On the heels of PayPal Holdings Inc’s (NASDAQ:PYPL) first-quarter earnings report, the shares jumped from $74 to $77.50 last week. But the gains did not hold. In fact, PayPal stock is now back to $74.
Yet, I think there are some key reasons to be bullish. After all, the Q1 report shows, yet again, that the company is in the growth phase, with revenues up 24% to $3.69 billion and earnings rising by 29% to 57 cents a share. The Wall Street consensus, on the other hand, was looking for revenues of $3.59 billion and earnings of 54 cents a share.
The guidance was also encouraging for PayPal stock. For the current quarter, the company projects revenues to range from $3.79 billion to $3.83 billion, compared to the analysts’ forecast of $3.75 billion. As for the bottom line, the guidance is for 55 cents a share — only one cent off Wall Street’s consensus.
OK then, so why the shakiness with PayPal stock after the earnings announcement? Well, there are pressures on margins, as the company continues to invest in new technologies. And there is a shift to newer platforms, like Venmo. Keep in mind that Venmo — which is a peer-to-peer payments system — has a generally lower fee structure.
Next, PayPal stock has already had a strong run. During the past year, the shares have logged an impressive 57% return. And, yes, this means that the valuation is far from cheap. Consider that the price-to-earnings ratio is 50.
Finally, there are ongoing concerns about PayPal’s separation of eBay Inc (NASDAQ:EBAY), which plans to move over to Adyen for payments processing.
Key Drivers for PayPal Stock
When Daniel Schulman took the helm of PayPal in the summer of 2015, he promised to double down on the digital wallet – and also to focus on the younger users. To this end, he has been aggressive with forming partnerships, which have increased the ubiquity of the PayPal platform.
There are extensive arrangements with mega-financial institutions like Visa Inc (NYSE:V), JPMorgan Chase & Co. (NYSE:JPM) and Bank of America Corp (NYSE:BAC). For example, last week PYPL and Barclays PLC (ADR)(NYSE:BCS) announced a wide-ranging agreement, which will involve cross-promotion of their products.
Meanwhile, PYPL has continued to forge alliances with the large tech companies like Apple Inc. (NASDAQ:AAPL), Facebook, Inc. (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG). In fact, the company has been able to get roughly half of Alibaba Group Holding Ltd’s (NYSE:BABA) AliExpress active sellers on its platform.
Bottom Line On PYPL Stock
Venmo came via an acquisition in 2013. At the time, Venmo was a much smaller part of Braintree Payments. No doubt, it turned out to be one of the biggest M&A transactions in tech history.
Again, the latest quarter shows the robust strength of Venmo, with payments volume spiking 80% to $12 billion. Keep in mind that PYPL has had to provide minimal amounts for marketing, as the platform has strong viral elements and network effects. Venmo has also helped to boost the company’s mobile footprint, with the volumes hitting $49 billion in Q1.
The payments service has become the must-have for Millennials, which is a demographic that is tough to target. Venmo’s social features also have allowed for exponential growth, since users share their purchases with their friends.
For now, Venmo is still in the early stages of monetization. But given the growth ramp and the focus on younger users, the business is likely to be a strong catalyst for the long haul. In other words, PayPal stock looks like a pretty good way to capitalize on the secular trend to mobile payments.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
