PayPal’s dominance in the online payment sector is being challenged, but its opportunities for future growth look promising.
Nov. 4, 2020
Despite reporting solid earnings for its third quarter this week, PayPal’s (NASDAQ: PYPL) shares fell almost 5% yesterday. Investors seem worried after PayPal announced that it expects adjusted earnings to grow just 17% in its fourth quarter, which is a massive slow down considering it grew 41% this quarter. The company may not be able to depend on the growth it has experienced this year continuing forever, but it still has many other tricks up its sleeve.
PayPal’s Smashing Earnings Report
This quarter has been a hugely successful one for the online payments leader with the explosion of e-commerce around the world. PayPal has become the top digital payment method for many small and larger merchants. CEO Daniel Schulman declared that its third-quarter had been ‘one of the strongest’ earnings seasons in PayPal’s history, as its Q3 report topped analysts’ expectations. Adjusted earnings per share beat the Street’s expectations at $1.07 on revenue of $5.5 billion, compared to experts estimates of $0.94 on $5.4 billion revenue. An addition of 15.2 million accounts this quarter has brought the company’s total active accounts to 361 million accounts.
The pandemic-fueled explosion of e-commerce trends this year has really benefited the company. Items that were previously only available to buy in-store are now being sold online. Merchants of all sizes are now using smartphone QR codes to allow shoppers to pay contactless with PayPal.
A slowdown of growth for the next quarter is expected as many retailers are already using PayPal to sell online or using its touchless payments in stores, meaning future growth will not likely come from rising e-commerce trends. The company needs to focus on continuing to be the go-to digital payment option for online shopping whilst enticing customers with new benefits. PayPal is offering a suite of inducements to users including cryptocurrency capability, syncing of Venmo’s wallet, peer-to-peer payments with shopping, discounts via Honey (a browser extension that shoppers can use to quickly find discount codes), digital bill payments, and buy-now-pay-later installment options. Chief Financial Officer John Rainey said that the company has focused on Venmo, a mobile payment service that is owned by Paypal, to build a wallet and payments product that’s expected to contribute positively to the company’s transaction margins in 2021. Last month, Venmo announced the launch of its first new credit card which will be offered to PayPal customers in the first quarter of 2021. Schulman said the new card will be a ‘true extension of the Venmo app and fully linked to its capabilities.’
Unfortunately, PayPal’s offerings are not unique and many rivals have created similar products. Square has a two-sided merchant-and-consumer business, the company has been in direct competition with PayPal in the small business market especially.
PayPal’s operating margin which included marketing, corporate costs, and tech spend was up 2% from last year’s 17.9%.
PayPal’s move into Cryptocurrency
Last month, PayPal announced plans to allow its customers to buy, hold, and sell cryptocurrency on its platforms. Users will be able to trade Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. On the day it made the announcement, the payments solutions leader’s shares reached all-time highs of $213.07. PayPal said that ‘consumers will be able to instantly convert their selected cryptocurrency balance to fiat currency, with certainty of value and no incremental fees.’ The service is set to be rolled out in 2021 and it plans to expand the features to Venmo and international markets. The company stated that it had obtained a conditional BitLicense from the New York State Department of Financial Services.
Is PayPal Stock a Good Buy?
The simple answer is yes.
PayPal stock is currently up 92% year-to-date. As it nears the end of this special phase of hypergrowth, the company has put itself into a strong position to compete against rivals and for other valuable business.
The critical questions for the business remain:
- Whether it can beat competitor digital payments services.
- If it can become a popular choice as a payment method in physical stores.
- Will PayPal’s new products, like its cryptocurrency service, be successful?
If PayPal’s previous business accomplishments are anything to go by, investors should have nothing to worry about as this company tackles current challenges with innovative ideas
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