- PayPal reported Q4 2015 earnings with better-than-expected results and in-line guidance.
- Investors’ concerns were dismissed, and PayPal presented impressive growth across the board.
- Impressive growth in mobile transaction and expanding emerging revenue streams while strengthening the core business make PayPal an attractive investment for the long run.
E-payments giant Paypal Holdings (NASDAQ:PYPL) reported its Q4 2015 earnings a few days ago, beating analysts’ consensus for revenue and EPS, issuing in-line guidance, and announcing a $2B buyback program. Since the split from eBay (NASDAQ:EBAY), PayPal’s stock fluctuated a lot and experienced a long 20% downtrend since July 2015. The two-day rally of 12% in PayPal’s stock price corrected some of the sell-off. However, the stock is still trading below the price at the date of the spin-off.
In an earlier article published before the earnings release, I highlighted four main focus areas: 2016 guidance, core transaction business growth, mobile progress, and value added financial services. PayPal’s guidance for Q1 and full year 2016 were in line with analysts’ consensus, which is much better than eBay’s soft guidance that triggered a 10% sell-off in the e-commerce giant’s stock. Even though PayPal did not issue a higher guidance than expected, only in-line figures, the fact that eBay disappointed analysts, highlighted PayPal as the superior of the two. As investors’ concerns rise about an extremely volatile year in the market and in the midst of intensifying competition in the e-payments space, an in-line guidance is reassuring investors and reducing the level of anxiety about PayPal’s stock for 2016. At least for now.
As shown in the chart below, PayPal increased revenues in both segments. The core transaction business processed $82B in total payment value (‘TPV’) and generated $2.2B in revenues in Q4, which represents an impressive increase of 29% YoY in TPV and 15% YoY in revenues. Out of the $82B, almost 25%was generated from mobile transactions. That reflect a 45% increase YoY. Core transaction revenues and mobile revenues from these sales are necessary to strengthen the company’s core business before it attempts to penetrate or monetize new businesses.
Looking at PayPal’s emerging revenue streams—Braintree, Xoom and Venmo—PayPal reported progress in many of these initiatives. PayPal closed the Xoom deal this quarter, which added one percent to the revenues growth in Q4 and added 1.6 million customers. PayPal’s Braintree was implemented into Facebook Messenger to power the new ride-hailing payment option directly from the Messenger app to enable customers to book and pay for Uber rides ordered through Messenger without the need to process the transaction in an additional external app. Venmo, the leading P2P transaction payment service for millennials, now enables customers to perform in-app purchases and book tickets through Gametime, or meals through Munchery.
The increasing attempts of PayPal to strengthen its core business while expanding its emerging businesses allowed the company to increase its customer base by 6.6 million customers, to a whopping 179 million active customer accounts.
PayPal announced the initial phase of a new partnership with Alibaba (NYSE:BABA) where Alibaba’s wholesale customers will be allowed to pay using PayPal. This is the first major partnership with an eBay-rival e-commerce company that PayPal is looking to engage in. Partnerships like this one were one of the positives for PayPal, as a standalone entity, following the eBay spin-off. While rumors of a deal with Amazon wouldn't have materialized into an actual revenue-generating agreement, the partnership with Alibaba is a great step in the right direction towards penetrating new e-commerce platforms while keeping the eBay business.
Looking forward towards the rest of 2016, PayPal investors should maintain their optimism, as I believe that PayPal stock will continue to rise above $40. Sell-side shops like Mizuho, Citi, BTIG, Wedbush, and RBC are all bullish on PayPal, citing the strength of PayPal’s core business, the company’s market leadership, mobile payment growth, and emerging revenue streams. In the long run, I see PayPal as a good holding to gain from the increased popularity of e-payments.