PayPal Holdings, Inc. (PYPL, Financial), one of the leading fintech companies in the world, reported better-than-expected first-quarter earnings on May 5, exceeding analyst expectations for earnings, sales and total payment volume.
The company reported adjusted earnings of $1.22 per share, which was significantly better than the expected $1.02 for the first quarter. PayPal has outperformed consensus EPS forecasts in each of the last four quarters, and I think this streak is likely to push the stock into new highs in the coming months.
The stock gained 5% following the earnings release, with the positive market reaction further fueled by the management's decision to raise its full-year projections as well.
First-quarter earnings recap
The company generated net income of $1.1 billion and revenue of $6.03 billion for the first quarter of 2021. Total payment volume grew 50% year-over-year to $285 billion, which was a milestone achievement for the company.
As of March 31, Paypal had 392 million active accounts after adding 14.5 million net new active accounts in the first three months this year, and the continued growth of the e-commerce industry in emerging markets was one of the leading contributors to this success. The company added 1.4 million new merchants as well, bringing the total active merchants on the platform to 31 million.
Venmo, a subsidiary of PayPal that is helping the company venture into the fintech industry aggressively, reported strong growth in the first quarter as well. Venmo handled $51.4 billion in total payment volume, up 63% year-over-year. With its recent launch of "crypto on Venmo," the company is now allowing more than 70 million Venmo customers to purchase, sell and store cryptocurrencies. The company is aggressively adding new use cases to Venmo to develop this payment application into something similar to WeChat in China, which is widely used by Chinese residents to not only transfer money to friends and family but also to process payments on e-commerce platforms.
On April 27, PayPal partnered with Cravings by Chrissy Teigen to introduce "Buy Now, Pay Later" on the lifestyle brand's online store. Since its launch, over a million retailers have introduced the "Buy Now, Pay Later" option on their online stores. A consumer does not have to worry about their credit score when using this facility to pay for purchased goods in four installments, and this is an interest-free scheme as well. PayPal, as evidenced from the rollout of this new funding scheme, is aggressively targeting segments of the financial services industry that are still predominantly controlled by banks.
Commenting on what is on the cards for the next 12 months, PayPal CEO Dan Schulman said:
"Over the coming year, we will accelerate our customers' digital engagement through the rapid innovation of our digital wallet and merchant commerce platform. Our addressable market continues to significantly expand driven by accelerating secular trends and the proactive steps we are taking to become a full commerce and payments platform. We believe that the shift in consumer digital behavior will remain essentially unchanged in a post-COVID world."
The expected reopening of the global economy in the second half of this year might initially lead to a decline in e-commerce sales, which is likely to negatively impact PayPal. However, long-term prospects are promising considering the expected market share gains for e-commerce in the global retail industry
Business partnerships will help PayPal thrive internationally
With its dominating presence in the digital payments industry, PayPal is expanding its business internationally by partnering with e-retailers and fintech service providers. In its first-quarter earnings release, the company confirmed that Alibaba Group Holding Limited (BABA, Financial) has agreed to accept PayPal on both its wholesale store and AliExpress, the retail store. China is the fastest-growing e-commerce market in the world, and Alibaba is the leading player in this industry. Considering these favorable demographics, the partnership with Alibaba can be expected to drive PayPal's earnings growth in the future.
Last March, PayPal partnered with FlutterWave, an African fintech company, allowing companies in Africa to have more access to PayPal customers to receive and make online payments. There are many up-and-coming nations in Africa, and PayPal is doing the right thing by moving into this fast-growing region before its rivals to establish first-mover advantages that could go a long way in helping the company earn economic profits for an extended period of time.
PayPal also partnered with Telr, an online payment gateway in the Middle East, enabling merchants in the UAE to accept PayPal for online purchases.
All these partnerships will open new doors for the company to thrive in the coming years, and it seems rational to expect continued earnings growth in the foreseeable future as a result of these collaborations.
Industry outlook
According to data from Grand View Research, the global digital payments industry handled transactions worth $5.44 trillion in 2020, and this number is expected to reach $11.29 trillion by 2026, growing at a compounded annual rate of 11.21%.
In 2020, North America dominated the industry, accounting for more than 35% of global sales. The growth of the e-commerce industry is expected to have a significant impact on the fortunes of the digital payment solutions industry. Global e-commerce sales are projected to reach $4.9 trillion in 2021, and a focus on convenience, favorable government policies and changing consumer behavior will contribute to the growth of this industry in the coming years.
Governments around the world are encouraging the use of digital payment methods to reduce the cost of printing currency notes and promote sustainable development, and this will play a key role in the next few years pushing the digital payments industry forward.
India introduced the merchant discount rate in 2019 to enable customers to make low-cost digital payments. Mexico's central bank announced the launch of CoDi, a smartphone payment system, in February 2019 to minimize cash transactions in the country. The Japanese government is already providing subsidies to promote digital payment in the country. All these regulatory decisions will have a positive impact on digital payment platforms including PayPal.
In addition, pandemic-related measures have boosted the growth of online sales, and in return, the use of online payment solutions. Due to the pandemic, e-wallets have grown in popularity for peer-to-peer transfers, consumer-to-business payments and bill payments. Customers all over the world have switched from offline to online shopping, which can be expected to leave a lasting effect on the payment industry.
The macroeconomic outlook is favorable for fintech companies, and PayPal, as a leader in this industry, seems well-positioned to convert this positive outlook into higher earnings.
Risks of investing in PayPal
PayPal is vulnerable to macroeconomic factors such as a slowdown in global economic growth, and its international presence exposes the company to currency and execution risks.
With the increasing support for digitalization, governments are encouraging the use of local payment processors or digital wallet companies, which is likely to pose a threat to the dominance of PayPal in the future. For instance, PayPal was forced to discontinue domestic payments in India as the company's business model was not in sync with the UPI model. Similar threats are likely to emerge in other regions as well, especially considering how governments are lining up to launch regulated digital payment solutions owned and operated by government entities.
Takeaway
PayPal had a strong start to the year, and its subsidiaries, Venmo and Honey Science, continue to see impressive growth. PayPal is richly valued in the market, but the market-dominant position of the company justifies this premium as competitive advantages will help the company earn economic profits over a long period of time. PayPal, therefore, seems an attractive option for growth investors with above-average risk tolerance.
Disclosure: The author does not own any shares mentioned in this article.
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