- PayPal reported higher than expected Q1, 2016 results with in-line guidance.
- Intensifying competition is not impacting PayPal as it continues to grow and accelerate its global expansion.
- I remain bullish on PayPal.
The e-payments giant Paypal Holdings (NSDQ:PYPL) reported its Q1, 2016 earnings last week with higher than expected revenues and EPS figures that triggered an after-hours rally in stock price. PayPal went into this earnings call amid rising concerns regarding the company’s ability to maintain its leadership position in the electronic and mobile payments markets following Apple's (NSDQ:AAPL) Apple Pay and AliPay's direct challenge, and concerns about overvaluation since the stock price increased impressively, crossing the $40 mark.
Looking at the competition, Apple has announced it is working on a peer-to-peer payment feature that will expand Apple Pay’s portfolio beyond in-store/in-app payments and compete directly with PayPal and its subsidiaries. Moreover, with Apple’s hardware business growth slowing down, the market is eyeing the services segment with Apple Pay at the center as the company’s next growth driver for Apple, which should put a lot of pressure on the tech giant to accelerate its efforts in the payments business.
At the same time, Alipay’s parent company has voiced its plans to expand globally and become a publicly traded company. Alibaba's (NYSE:BABA) finance affiliate, Ant Financial, the parent company of AliPay, is expected to go public this year in Shanghai and Hong Kong with a massive $60B valuation and attract both Chinese investors (in the Shanghai exchange) and international investors (in the Hong Kong exchange). AliPay currently controls more than 50% of the total Chinese e-payments market and 82% of the mobile payments market in China – making it the biggest e-payment vendor in China.
However, according to much speculation, Ant Financials is looking to go public just to prepare the surface for its global expansion and become a better-known brand to investors and consumers worldwide. Even though investors are very concerned about PayPal’s performance this year, in light of the increased competitive pressure mentioned above, the company reiterated its full-year guidance for revenues, keeping them in line with market expectations, representing a median growth rate of 15% YoY. PayPal’s in-line guidance strengthened the market's confidence in the company’s growth, at least in 2016, and drove sell-side shops to maintain their price targets. For example, Citi and UBS maintained their bullish view, with price targets of $46 and $42, respectively.
Looking at PayPal’s first quarter results, the company reported 19% YoY growth in its top-line revenues, with transaction revenues accounting for 88% of total revenues with 17% YoY growth. Transaction revenues growth is mainly due to a 29% increase in total payments volume (totaled $81.1B) that offset a slight drop in the transaction margin that reached a low figure of 60.4%, mainly driven by Braintree pressuring down the company’s transaction revenues. The impressive growth in TPV is motivated by a 54% increase in mobile payments and a 154% increase in Venmo payments which represent 15% of the $21B TPV that PayPal generated from mobile devices.
Even though PayPal is trying hard to expand its global offering and strengthen its global presence with Xoom and Chinese penetration, its international revenue growth is flat (while U.S. revenue growth rate rises), driving the portion of international revenues out of the total revenues down to 47%. This trend might emphasize the problem PayPal is facing when trying to penetrate the Chinese market; however, it also highlights the strength the company has domestically. These are two important points to notice following the intense competition from Apple Pay and AliPay that try to challenge PayPal in the U.S. (AliPay global growth) and in China (Apple Pay penetration into China while AliPay's position is stable there).
Going forward, PayPal will focus on global expansion by accelerating Xoom expansion to more countries and partnering with Europe’s largest mobile carrier, Vodafone, Mexico’s Telcel, and Brazil’s Claro to support its independent branded Wallet transactions. PayPal is also extending its partnership with Alibaba Wholesaler as it penetrates more countries worldwide, as well as its partnership with Facebook in Messenger and the app shop.
Although PayPal is under a lot of pressure from domestic and international competitors while struggling to grow its emerging businesses, Braintree, Xoom, and Venmo, and improve monetization from these, PayPal still seems like the best play in the e-payments market. The company continues to grow relentlessly, engages in new strategic and significant partnerships, and strive to grow even further as the e-payments industry takes off. I remain very bullish on PayPal and believe that the company has much more room to grow. For now, the competition is not impacting the company substantially.