PayPal Results Driven by Strong Customer & Transaction Growth

PayPal Holdings (Nasdaq: PYPL) reported earnings (PDF) after the market closed on Wednesday and it was a pretty good quarter for them:

• Net operating revenue of $3.69 billion, up from $2.98 billion (24% increase year-over-year)
• Net income rose to $511 million, up from $384 million (33% increase YOY)
• Earnings of $0.42 per share, up from $0.32 per share (33% increase YOY)

If you’ll recall from earlier this week, PayPal is a part of my “War on Cash” basket with Mastercard (NYSE: MA), Visa (NYSE: V), and Square (NYSE: SQ). All of these stocks received a boost in after-market trading on Wednesday because of these results from PayPal and Visa (which I wrote about here), so I’m sure this trend will continue when the others release earnings next week.

The “War on Cash” thesis remains strong, as PayPal saw its transaction volume increase for the quarter. They processed a total of 2.2 billion transactions, which was an increase of 25% over the prior year’s quarter. Total payment volume increased 32%, up to $132 billion. They also saw growth in the total number of active PayPal accounts, with 8.1 million new accounts added, a net increase of 35%. On average, each active account processed 34.7 payment transactions, which is remarkable considering that PayPal isn’t just used on eBay anymore. This all reiterates that more and more transactions are being completed in a cash-free manner.

But you shouldn’t be invested in a company based on what they have done, but what they anticipate to do in the future. In this regard, PayPal updated its overall financial outlook for the remainder of the year. PayPal “expects revenue to grow 16-18%” which includes the expected impact “related to the sale of U.S. consumer credit receivables to Synchrony Financial.” This sell is expected to close at the beginning of the third quarter 2018, so we won’t see the impact reflected for quite some time.

Should these projections come to pass, PayPal should expect annual revenues of around $15.3 billion and earnings of $1.75 per share. Based on their current P/E (approximately 50), we could expect an expected share price of around $87.50 if those earnings come to pass, which would be a 17% increase over the current price. That’s a lot of positive upside, and will warrant some monitoring over the remaining three quarters of the year.

These results reinforce my decision to keep PayPal as a long-term holding in the portfolio, and I expect to see great things from this company going forward.

Until next time…

Disclosure: I have purchased shares of PayPal holdings, Visa, Mastercard, and Square on behalf of my mother and have no intentions of adding or selling shares over the next 30 days. Please read my full disclosure here.