Currently, Paypal Holdings Inc (NASDAQ:PYPL) shareholders are learning firsthand some of the oddities of the markets. Despite delivering some great numbers for its recent first-quarter 2018 earnings report, with payment app Venmo being a highlight, PayPal stock fell on the disclosure. As of Tuesday morning, shares are up barely 1% from earnings day.
If you’re confused about the company’s weakness in the markets, you’re not alone. On a non-generally accepted accounting principle basis, PayPal delivered 57 cents earnings per share. This was 3 cents above analysts consensus. More importantly, earnings per share were up a robust 24% from the year-ago quarter. On the revenue side, PayPal hauled in $3.69 billion against a $3.59 billion target.
The hits didn’t stop there. Of interest to Wall Street was Venmo and its impressive rise in the social payments platform ranking. Venmo processed $12 billion of total payment volume (TPV), which is up an impressive 80% from one year ago.
In the last two quarters, TPV growth was almost the same at above 15%. This metric tells me that the PayPal app is still very much in the early phase of its development.
Overall, the company processed $132 billion in TPV during Q1. This figure was helped in part by management adding 8.1 million new active users for the quarter. Breaking it all down, PayPal processed just under 35 payment transactions per active account.
Unfortunately, the markets took a dim view on the proceedings. Year-to-date, PayPal stock has gained a completely unimpressive 0.6%. Largely, shares have been in a funk since early February.
Can the digital payments processor spark momentum? Or is PYPL doomed to stay uncompetitive?
Venmo Is Still Promising Despite PayPal’s Volatility
One of the things that I was worried about heading into the company’s Q1 report was raised expectations. I specifically stated that the “honeymoon phase is over.” In order for investors to buy in, they needed to see something special.
The perma-bulls might say that Q1 was indeed special. Not taking anything away from management’s success, but they did everything they were supposed to do. I stated heading into the earnings report that “I wouldn’t be surprised if PayPal stock hits on all counts.” Based on historical performances, you’d be crazy to bet against the company.
The problem comes down to valuation. I believe that the low-hanging fruit for PayPal stock has been taken. It’s no longer enough that the company that spun-off from eBay Inc (NASDAQ:EBAY) is putting up solid numbers. We know that PayPal as a whole is a dominant player in the digital-payments industry. But where does it go from here?
The answer might be cryptocurrencies. The production team for Verge (XVG), a relatively obscure alternative cryptocurrency, or altcoin, recently announced a partnership with a popular adult website. XVG’s value mooned, in part because of the announcement, and also due to the credibility boost. That is, Verge isn’t just a speculative altcoin but its blockchain apparently has technical utility.
Rumors have it that Venmo is looking to integrate cryptocurrencies into its payment platform. Supposedly, the app’s management team will make an announcement later this year. Adding to the anticipation, Verge could be a prime candidate.
To be fair, I’m not entirely sure if Venmo adding XVG would benefit PayPal in the long run. Being associated with the adult entertainment industry isn’t great for a wide-scoped business. But the idea of adding altcoins to the mix? This is exactly what PayPal stock needs!
Be Patient With PayPal
Although I believe the cryptocurrency deal should, and will, occur, don’t forget the bigger picture for PayPal stock. An investment here represents the growing transition from physical payments to digital. With PYPL, it’s not about the profitability angle, but rather, the convenience.
Lost in the crypto craze is that many people actually use these blockchain reward tokens for various transactions. With Venmo onboard, its customers can enjoy greater access to the digital payments world. And with many companies like Facebook, Inc. (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG)(NASDAQ:GOOGL) avoiding cryptocurrencies, Venmo can set itself apart.
Not only that, the sky is really the limit. Last year, a survey of adult internet users in the U.S. revealed that 83% didn’t have or use Venmo. In other words, PayPal has a huge education and product evangelism opportunity. If even a modest portion of that 83% were converted, the company would receive a significant boost to the top and bottom lines.
Thus, I urge patience with PayPal stock. Right now, investors don’t see anything new with the company, and are therefore avoiding shares. But there’s simply too many good opportunities available for this situation to last indefinitely.
As of this writing, Josh Enomoto owns Verge (XVG).
