Company Overview: PayPal Holdings, Inc. is a technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants. The Company's combined payment solutions, including its PayPal, PayPal Credit, Braintree, Venmo, Xoom and Paydiant products, compose its Payments Platform. It operates a two-sided global technology platform that links its customers, both merchants and consumers, around the globe to facilitate the processing of payment transactions, allowing it to connect merchants and consumers. It allows its customers to use their account for both purchase and paying for goods, as well as to transfer and withdraw funds. It enables consumers to exchange funds with merchants using funding sources, which include bank account, PayPal account balance, PayPal Credit account, credit and debit card or other stored value products. It offers consumers person-to-person payment solutions through its PayPal Website and mobile application, Venmo and Xoom.
 


PYPL Details

PayPal Holdings Inc (NASDAQ: PYPL) has been gaining momentum with support coming in from the recent quarterly results and updates. Outstanding financial performance, growth in active customer accounts, expanding partnerships, asset-light initiatives and progress at Venmo look to be the key positives for the group.

Strong third quarter of 2017 performance: PayPal lately reported a 31% growth in the adjusted earnings per share of 46 cents in the third quarter of FY17 while adjusted revenue growth of 21.4% to $3.2 billion was noted. The group posted the non-GAAP operating margin of 19.9%, the operating cash flow of $1.006 billion and 36% growth in the free cash flow to $841 million. Additionally, in the third quarter, the group has added 8.2 million active customer accounts with the net new actives growth of 88%. The company has 218 million active customer accounts, with more than 17 million merchant accounts. There is a 26% growth in the payment transactions to 1.9 billion and 32.8 payment transactions per active account on a trailing twelve months basis, which is a growth of 9% in the third quarter. The group’s Cross-border trade (CBT) was 21% of TPV (total payment volume) during the quarter, which is a rise of 24% at spot as compared to the third quarter of 2016. PYPL has over 52% of active accounts outside the U.S. while Average Payment Volume (APV) reached $60, which is a rise of 4% on a year over year basis. The Transaction take rate fell over 16 basis points owing to P2P growth (including Venmo), foreign exchange, and lower take rates from bill pay transactions (TIO Networks). Overall, the TPV of $114 billion was up 30%, or 29% on an FX-neutral basis. Merchant Services (non-eBay related) volume contributed 86.5% of TPV during the third quarter of 2017 and rose over 34% on an FX-neutral basis boosted by core PayPal and Braintree. In addition, over 35% of payment volume came through mobile device while mobile payments volume grew 54% over the same period last year to over $40 billion. The Person-to-Person (P2P) volume grew 47% to $24 billion during the quarter, and formed around 21% of TPV. Over the past twelve months, Venmo, the company's social payments’ platform, had processed over $30 billion of TPV, growing by 106% as compared to the same period last year. In the third quarter, Venmo had processed over $9 billion of TPV, growing by 93% over the same period last year.
 

Growing payment transactions (Source: Company reports)
 
Extending the partnership roots:PayPal has been continually building on its partnership strategy to extend the relevance of its platform and add value for its consumers and merchants. It has partnered with household names like Mastercard Inc, Visa Inc, JPMorgan Chase & Co, Alphabet Inc’s Google, Apple Inc, Facebook Inc and Microsoft Corp’s Skype. Further, PYPL is in a strategic partnership with Bank of America to allow bank’s customers to transact with PayPal in stores and seamlessly link their Bank of America cards into PayPal. This move provides new experiences for the bank’s customers in the first half of 2018 to manage the ‘shop how, where and when’ ability by leveraging the power and convenience of PayPal’s platform. Overall, delivering in-store payments, account linking, and digital representation of Bank of America cards with improved security and convenience have been said to be the key aspects emerging from the partnership. Additionally, during the third quarter 2017, PYPL announced a partnership with Skype to allow users in 22 countries to send money to other Skype users with PayPal through their Skype mobile app. PYPL has also announced the expansion of its partnership with Mastercard into Canada, Europe, Latin America and the Caribbean, and the Middle East and Africa. Moreover, in the third quarter, the acquisition of Swift Financial, which is a leading provider of working capital solutions to small businesses in the U.S., has been closed along with the acquisition of TIO Networks. The group has been seen to be backing up a small UK startup that uses artificial intelligence for online spending. PYPL’s multiple expansion efforts with commendable execution and better efficiencies are expected to add to earnings in the future.
 

Expanding strategic partnerships (Source: Company reports)
 
New Addition to the Board of Directors:PayPal has appointed Rodney C. Adkins to its Board of Directors. Mr. Adkins has been said to serve on PayPal’s Audit, Risk and Compliance Committee and his appointment was effective September 26, 2017. He is a seasoned technology and business executive with experience in leading transformative product introductions and developing innovative business solutions. The PYPL’s Board of Directors are now increased to 11 members.
 
Balance sheet highlights: The group has cash, cash equivalents, and investments of over $7.0 billion which comprised $5.8 billion from international and $1.2 billion from U.S. markets. They completed TIO Networks and Swift Financial acquisitions during the year. The group also returned over $706 million to shareholders during this year to date by repurchasing 15.7 million shares at an average price of $45.02. The group has a credit loans receivable of $6.7 billion, with $830 million in merchant lending receivables including PayPal Working Capital advances as well as the portfolio from the acquisition of Swift Financial.
 

Free cash flow performance (Source: Company reports)
 
Outlook:PayPal expects the adjusted earnings in the range of 50 cents to 52 cents per share in the fourth quarter of 2017. The adjustments reflect over $225 - $240 million, primarily representing estimated stock-based compensation expense and related payroll taxes in the range of $205 - $215 million. PYPL in the fourth quarter, expects revenue to grow by 20% - 22% at current spot rates and 20% - 22% on an FX-neutral basis, to be in a range of $3.570 - $3.630 billion. Moreover, PYPL expects revenue to grow at 19% - 20% at current spot rates and 20% - 21% on an FX-neutral basis, while being in the range of $12.920 - $12.980 billion for the full year of 2017. The non-GAAP earnings per diluted share is expected to be in the range of $1.86 - $1.88. The adjustments reflect approximately $890 - $905 million, primarily representing estimated stock-based compensation expense and related payroll taxes in the range of $730 - $740 million. For FY18, the group also expects their Spot TPV growth to be in the mid to high 20% while Spot Revenue rise of over 20% is expected. PYPL’s non-GAAP OI growth of over 20% with the GAAP Operating Margin to expand in-line with non-GAAP Operating Margin, has been signaled by the group.
 
Stock Recommendation:The group has delivered one of their strongest quarters since they became an independent company. Particularly, PYPL separated from online marketplace eBay Inc in 2015, and has reshaped themselves. From a mere role of processing transactions for its parent company, PYPL has transformed itself into a payments giant that handles money transfers between other companies and individual customers. Furthermore, PYPL has been expanding its services to gain advantage over rivals in the digital payments market, particularly in person-to-person payments, where competition stands intensified. The group has over 70 million consumer accounts opted into One Touch as of the third quarter of 2017 and over 6 million of merchants accepting One Touch. The shares of PYPL surged over 64% in last one year (as of October 25, 2017) and we believe this bullish momentum in the stock would continue. PayPal is clearly gaining share as a payment method platform, and accordingly improving the strong network effect that has characterized the company’s growth. Overall, the company is expanding as a result of the self-fueling network effect and the supporting strong performance offers an operating leverage. Anticipated returns from Venmo are also expected to be fruitful for the group. We give a “Buy” recommendation on the stock at the current price of USD71.02

 
PYPL Daily Chart (Source: Thomson Reuters)

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