Largely due to a falling "take rate" -- the piece of the online payment pie PayPal (NASDAQ:PYPL) gets from each transaction -- its stock price took a slight hit following its first stand-alone earnings report announced Oct. 28. Some analysts also got onboard the negativity train, dropping their target prices following PayPal's Q3 "disappointment," despite beating estimates and growing its top and bottom lines.

Even after being downgraded PayPal's target price of $44 is well above current levels, as of this writing. Of course, if analyst's expectations are that PayPal "only" offers about 24% appreciation, that's not much of a downgrade. Based on a few key takeaways from PayPal's earnings news, even that $44 price target could prove conservative.

Ease up on the take rate
Followers of PayPal had been expecting a drop in its take rate this quarter, in large part because its secured several new partnerships with some huge players including Macy's and Latin America's largest wireless provider America Movil. The problem associated with bringing on the big hitters is that they are able to negotiate PayPal's take rate down because they bring so much volume.

In fact, inking deals with the Macy's of the world is part of the reason PayPal was able to increase its total payment volume (TPV) by 27% to a whopping $70 billion last quarter, which in turn drove record revenue of $2.3 billion, a 15% improvement year-over-year. But PayPal's payment volume and revenue improvements were overshadowed by a take rate drop to 3.24%, from last year's 3.39%. The drop itself wasn't a surprise, but the size of the drop was.

For investors overly concerned with PayPal's take rate declines, brace yourself: there's more coming. As PayPal CEO Dan Schulman said, the "take rate will continue to fall, but overall profits from more revenues will increase." All-in-all, that sounds like a fair trade. By comparison, PayPal's take rate isn't bad relative to the payments industry. Take Visa (NYSE:V), one of the world's biggest payment processors, as an example.

On average, Visa's take rate is about 2%. Of course, there are variable rates and other factors including the size of the customer, but that's it when all things are considered. The reason is the same as why PayPal's cut is declining: Visa counts virtually every large customer in the world as a client, and they simply won't pay the same as the local pizza restaurant. Visa, like PayPal, opts for volume over rates.

Venmo's about to go mainstream
Though it remains small in PayPal's overall scheme of things, its Venmo property is growing by leaps and bounds. Last quarter's $2.1 billion in payment processing was more than twice that of a year ago, and plans are to crank that up even further.

Until now, Venmo was a peer-to-peer only payment option. However, PayPal said during its conference call that those days are over. The new "pay with Venmo" service will open the door to using it for online and mobile app payments with any PayPal merchant. Pay with Venmo is the first, significant upgrade PayPal has made to it, but it won't be the last.

Plans are to eventually expand pay with Venmo to PayPal's in-store payments alternatives including Macy's and others, at some point in the not-too-distant future. Venmo's payment volume in Q3 was a small piece of PayPal's, but that's going to change for the better with each passing quarter. And at the same take rates, Venmo will also begin adding meaningfully to PayPal's bottomline, too.

Looking ahead, PayPal expects growth to continue with revenue climbing between 15% and 18% from 2014's $8.01 billion, and non-GAAP (excluding one-time items) earnings-per-share (EPS) in the $1.23 to $1.27 range. Both revenue and EPS expectations are right in line with analyst estimates of $9.2 billion in sales, and $1.26 non-GAAP EPS.

Already, it appears investors have realized the take rate fears were unfounded as PayPal's stock claws its way back to pre-earnings levels: and they're right. Now consider that more big deals like the one with Macy's are on the horizon and Venmo is ready to contribute a lot more to PayPal's bottomline: it's no wonder Schulman is expecting double-digit growth this year.

 

Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends PayPal Holdings and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.