PayPal (PYPL, Financial) reported its third quarter results after market hours on Thursday. The $53 billion online payment processor delivered 17.47% sales growth to $7.86 billion and 17.42% profit growth to $1.01 billion three quarters into the fiscal year, compared to the same period last year. PayPal closed +10.13% the following day while the broader market, Standard & Poor's 500, closed -0.01%.
Market performance
PayPal returned 30.5% since PayPal spun off from eBay (EBAY, Financial) on July 18, 2015 (1). Meanwhile, the S&P 500 returned 8.4% in the same period.
Valuations
PayPal had a trailing 12-month price-earnings (P/E) multiple of 39.5 times (16.8 industry median), price-book (P/B) value 3.8 times (1.3 industry median) and price-sales (P/S) ratio 5.4 times (3.5 industry median) (2).
(PayPal, Annual Filing)
PayPal
PayPal was established in 1998; among the founders was Elon Musk. After its initial public offering in 2002, the company was acquired by eBay for $1.5 billion later in that same year. PayPal had about 17 million users at the time, but that grew to 192 million active customer accounts as of Sept. 30, an 18.9% computed annual growth rate.
In its filing, PayPal is a leading technology platform company that enables digital and mobile payments on behalf of consumers and merchants worldwide.
PayPal provides simple, affordable, secure and reliable financial services and digital payments around the world. The company facilitates person-to-person payments through PayPal, Venmo and Xoom. PayPal combined payment solution capabilities, including PayPal, PayPal Credit, Braintree, Venmo and Xoom products.
PayPal offers its customers the flexibility to use their accounts both to purchase and be paid for good, as well as transfer and withdraw funds. According to PayPal, a consumer can typically fund a purchase using a bank account, a PayPal account balance, a PayPal credit account, a credit or debit card or other stored value products such as coupons and gift cards.
PayPal’s namesake, Venmo, and Xoom products also make it safer and simpler for friends and family to transfer funds to each other, including cross border transfers using several of these funding sources. The company also offers its business account users (merchants) an end-to-end payments solution that provides authorization and settlement capabilities as well as instant access to funds.
PayPal reports its figures for payment volume and payment transactions (2)(3). In 2015, PayPal completed $282 billion worth of transactions, a 20% growth from the year prior. In the third quarter PayPal completed $87 billion worth, up 28% on a foreign exchange-neutral basis.
In 2015, the company processed approximately 4.9 billion payment transactions, a 24% growth from 2014. In the third quarter PayPal stated it had 1.5 billion payment transactions, which was a 13% increase on a trailing 12-month basis.
PayPal generates its revenues by charging fees for providing transaction processing and other payment-related services, primarily based on the volume of activity processed through its Payments Platform. Also, the company earns its revenue by providing value-added services to consumers and merchants, such as its PayPal Credit and Paydiant products.
PayPal’s Braintree products strengthen its position in mobile payments with earlier stage merchants. PayPal’s Venmo app, meanwhile, is a leading mobile application to move money between friends and family using mobile devices.
PayPal’s Paydiant, acquired in April 2015 for $230 million, facilitates PayPal’s capabilities in mobile payments. PayPal’s Xoom, acquired in November 2015 for $1.1 billion, offers a broader range of services to PayPal’s global customer base. Xoom accelerated PayPal’s entrance into the international remittances markets.
Geographically, the U.S. contributed 50.2%, or $4.64 billion, to total fiscal year 2015 sales. Other countries represented another 36.9%, and 12.9% came from the United Kingdom.
As per segment, PayPal’s transaction revenue (fees from transactions) contributed 87.9% in 2015 and grew 14.4% to $8.1 billion year on year. In the third quarter alone, transaction revenue contributed 86.8% in sales and grew 16.75% to $2.3 billion. PayPal’s other value-added services contributed 13% to $353 million from $276 million in the same period last year.
PayPal’s transaction revenue segment had a nine-month average margin of 59.6%. Overall, PayPal had a three-year sales and profit growth average of 17.8% and 53.2%.
Cash, debt and book value
As of Sept. 30, PayPal had $5.09 billion in cash and short-term investments and $0 debt. The company also had 13.75%, or $4.3 billion, of its $31.4 billion assets in goodwill and intangibles with a book value of $14.2 billion.
Cash flow
(PayPal Cash Flow, Quarterly Filing)
Nine months into this fiscal year, PayPal grew its cash flow from operations by 22.94% to $2.2 billion from the same period last year. The company spent $517 in capital expenditures, leaving it with plenty of free cash flow in contrast to its business operations at $1.7 billion. Nonetheless, PayPal spent $945 million, or 55% of its free cash flow, in share repurchases.
PayPal also allocated $16.98 billion in investment purchases for the period and had $14.6 billion in maturities.
Conclusion
(PayPal Share Price, Google Finance)
PayPal is not an ordinary tech business that just came out of nowhere. The company has extensive roots in operating and processing online payment transactions. With its history riding through the millennial tech boom, the company created, sustained and facilitated its presence in the web.
Compared to the $10 billion Western Union (WU, Financial) that had most of its its 165-year history with providing money transfer services and had a 3.14% dividend yield but three-year sales and profit growth figures of -1.08% and -1.6%, PayPal seemed to be more promising (4).
Nonetheless, PayPal seemed to be highly rewarded by the market in current times. Barclays on Friday rated PayPal’s shares as overweight with an increased price target from $42 a share to $47.
In conclusion, PayPal is a HOLD.
Note
(1) One-year return according to Morningstar data.
(2) Annual/Quarter filing: PayPal also reports the total amount, or payment volume, it successfully completed through its Payments Platform.
PayPal’s Payments Platform enables the company to connect parties regardless of whether the transaction is occurring at a traditional physical location, online or through a mobile device.
Payments Platform connects with financial institutions around the world and allows consumers to make purchases using a broad range of payment methods, regardless of where a merchant is located. The platform allows the customers to send payments in more than 200 markets across the globe and in more than 100 currencies.
Payment volume is the value of payments, net of payment reversals, successfully completed through PayPal’s Payments Platform, excluding transactions processed through its gateway and Paydiant products.
(3) Annual/Quarter filing: Payment transactions is the total number of payments, net of payment reversals, successfully completed through PayPal’s Payments Platform, excluding transactions processed through its gateway and Paydiant products.
(4) Morningstar data.
Disclosure: I do not have shares in PayPal.
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