Why PayPal Holdings Inc (PYPL) Is On A Strong Footing?

PayPal Holdings Inc (NASDAQ:PYPL) is trying to show its full capability in performance or the potential following the split from the parent company, eBay Inc (NASDAQ:EBAY). In fact, both the companies are focusing on their strength to gain much from the market. PayPal delivered the first stand-alone quarterly numbers recently. While its earnings topped the expectations by 6.9%, its revenue fell modestly by $10 million. As a result, the market was getting dizzy, which should not have happened. That is because its fundamentals were still strong and operating margins were improving apart from the tactics adopted for diversified growth.

Investors, as well as analysts, were concerned about the drop in the take rate of PayPal Holdings Inc (NASDAQ:PYPL). However, if one considers it with the rivals, its take rate continued to be strong. Also, when the company is aiming to achieve strong growth in the bottom line, some compromises needed to be done and payment processor did exactly that. Therefore, it remains on a strong footing only to deliver continued robust results. Let’s see the reason behind this opinion.

Monetizing Of Venmo App

One of the key steps that PayPal disclosed recently was the plan to monetize its famous Venmo App, which has the potential to generate additional revenue for it. That will also reduce its dependence on eBay Inc (NASDAQ:EBAY) to some extent. Currently, there is agreement that 80% of the online auctioneer’s gross merchandise value would be routed through PayPal Holdings Inc (NASDAQ:PYPL) for a five-year period. It has both advantages, as well as, disadvantages. However, for the moment, it is only an advantage. Venmo App is a peer-to-peer payment app and witnessed significant growth to become a bigger set up from being a small venture after it was acquired by the payment processor firm.

Until recently, Venmo app was used free of charges as all the transactions were free except through credit card. During its earnings call, the company indicated that it would start collecting the standard fees for every transaction as the app seemed to have become a popular one. PayPal Holdings Inc (NASDAQ:PYPL) said that it was recording less than a billion dollar only for every quarter until last year, and that has changed most recently. For instance, it could record $1.6 billion worth of processing in the June quarter. That number advanced 31.3% to $2.1 billion in the September quarter. Venmo app’s initial focus was on college-age citizens but slowly branched out to other sections also.

Revenue Stream Expansion

Venmo App is one of the revenue stream expansion avenues. PayPal Holdings Inc (NASDAQ:PYPL) said that the users of Venmo app would be enabled to make payment wherever it was accepted. That would make it still more popular app in the upcoming quarters. Aside from that, Venmo app is the best bet against the recent entrants like Alphabet Inc (NASDAQ:GOOGL)’s Google Wallet or Android Pay and Apple Inc. (NASDAQ:AAPL)’s Apple Pay. Currently, the company needs to push it to realize its full potential, which it is doing by accepting wherever PayPal is there.

The company appears to believe that there are options outside the payment processing. For instance, PayPal Holdings Inc (NASDAQ:PYPL) has tasted success with its credit loan program. The objective of the PayPal Credit loan program is to lend to small merchants. The company will collect the lent money through the transactions of PayPal. Of course, it is still in the nascent stage only as the company is yet to provide any specific numbers to be highly optimistic like Venmo App. However, that is another source of revenue that the company would not like to ignore in the long-term. Also, the move would help to strengthen its relationships with the merchants. Such services would not only provide the company with a first-mover advantage but also cushion it from any weakness in the industry. These services would play a bigger role in the final analysis.

Key Fundamental Metrics

PayPal Holdings Inc (NASDAQ:PYPL) delivered 15% YOY growth in revenue to $2.3 billion in the third quarter while EPS advanced 28%. Its operating margin improved by 80 basis points on a GAAP basis and two percentage points on an adjusted basis. That translates into 15% and 20% respectively. Its operating margin is a key factor considering the fact that its take rate witnessed a dip in the third quarter and the company indicated a further fall in the upcoming quarters. The company clearly stated that its objective was to increase its share and boost profitability. Therefore, the company is trying to offset the take rate weakness in operating efficiency. It was probably the only firm to have reported profit while others incurred losses in the third quarter.

One of the factors for PayPal Holdings Inc (NASDAQ:PYPL) to report revenue below expectations was the take rate. Its take rate fell to 3.24% from 3.39% in the year-ago quarter. The company’s CEO, Dan Schulman, said that its focus was on overall profit growth from more revenues, which meant compromising few basis points in take rate. However, that cannot be termed as bad considering that Visa Inc (NYSE:V)’s take rate, on average, is approximately 2% only. By opting to volume over the rates, more big clients can be added thereby reducing its dependence on eBay Inc (NASDAQ:EBAY). The company needs to cut down its reliance on the online auctioneer. Take rate compromise is one of the options to lure more customers.


The reason for PayPal Holdings Inc (NASDAQ:PYPL) staying on a strong footing is that the company has taken steps to reduce its dependence on its parent company as the agreement is valid for five years. The company is also focusing on generating additional revenue like Venmo and credit loan. Its operating margin improvement enables it to compromise few basis points on take rate. The company is also well-placed to face the new entrants bravely. Therefore, in all respects, the company is looking strong.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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