Forget about Apple Pay. According to a December survey by Retale, only 20% of US consumers prefer the payment service, a similar percentage as last year. 50% of consumers prefer PayPal’s mobile payment service, trumping consumer banks as well (27%). PayPal remains the leading digital wallet platform and its position gets stronger and stronger. During the recent Q4-earnings release, the San Jose-based company once more underlined its strong business case and reported better-than-expected results at top and bottom line. Moreover, PayPal is able to substantially increase its presence in mobile payments. And if that’s not enough, subsidiaries Braintree, Xoom and in particular Venmo see a sharp rise in usage and transaction value. CEO Dan Schulman said on the earnings call that his company is ahead of its competitors: “While many others are attempting to play in this space, PayPal continues to gain market share.” The best part of PayPal’s growth story? There’s still plenty of upside for investors.
PayPal beats analyst expectations
During the fourth quarter of 2015, PayPal recorded revenues of $2,556 million, well ahead of analyst consensus at $ 2.51 billion. For whole 2015, revenues reached $9.25 billion (up 15%). At bottom line, the company beat analyst expectations with EPS (excl. items) of $0.36 (vs $0.35 expected). Net income (incl. items) rose to $367 million from $286 million previously. PayPal saw its number of active users increase with 6.6 million to 179 million, significantly more than the 177.3 million the market was aiming for. What’s more, the number of PayPal One Touch users rose to 15 million, up from 10 million in December. One Touch is an important factor in PayPal’s mobile future. The feature makes it possible to make online payments with a single tap/click and is a driver of transaction traffic, particular among millennial customers. More than one million merchants have signed up and PayPal plans to rollout One Touch to 100 countries in H1-2016. The service is currently available in 23 countries.
Mobile transactions increasingly important
Total payment volume of merchant services rose 36%. Next to that, the number of transactions per user increased as well, and against a higher amount per transaction. Users made 27 transactions on average, compared to 25 during the same period last year. An important driver of future growth is PayPal’s mobile segment, as shoppers are moving towards mobile devices. The mobile segment grew 45% during Q4 and now accounts for 25% of total revenues. As said, One Touch is an important service due to its simplification of the check-out process. But also PayPal’s subsidiary Venmo plays an important role in mobile growth. The ‘social payments’ app processed $2.5 billion of TPV, up 174% YoY. PayPal seeks to monetize Venmo, since its peer-to-peer transactions are currently free. Venmo users can make in-app purchases to buy tickets at Gametime and gourmet meals delivered on Munchery. This is currently part of a trial, a roll-out to more US merchants has yet to be confirmed.
Position PayPal in e-transactions gets stronger
With an annual growth rate of 18% in e-commerce sales, an e-wallet service such as PayPal is obviously in the right market. We have to keep in mind that e-commerce sales are still a small part of total retail. By 2018, the share is still only 8.8% (up from 5.1% in 2013). To keep it in perspective: e-commerce sales are expected to reach a total amount of $2.5 trillion by 2018. PayPal is likely to outpace the market growth rate thanks to its dominant position. But that’s not the only reason why the company is expected to become even more dominant. Thanks to its subsidiary Xoom, an online provider of money transfers, PayPal holds a strong position in worldwide cross-border transactions. Subsidiary Braintree enables PayPal to benefit from payments of disruptors Uber and Airbnb. Some analysts say that PayPal is ‘cornering of the market that they play best in’, leaving little space for competitors to break through, despite attempts by big names, such as Apple.
PayPal shares attractive despite above average P/E-ratio
And the good news for investors: PayPal remains attractively valued on the stock exchange. Make no mistake: the price/earnings ratio of 23 (based on 2016 EPS of $1.48) should not considered as a bargain. But it’s certainly not expensive either. The P/E-ratio is in a similar league as Visa (25.1) and MasterCard (22.2). However, PayPal generates much more cash flow per share compared to the two giants. Measured to price/cash flow-ratio, PayPal is a bargain with a ratio of 14.3 compared to 22.7 for Visa and 20.4 for MasterCard. The company holds a big advantage compared to its peers: its position in mobile payments and in particular social payments. For instance, PayPal’s partnership (trough Braintree) with Pinterest for the ‘Buyable Pins’ feature shows that the company is a frontrunner is this field. Together with One Touch, its subsidiary Venmo, PayPal holds an excellent position in serving millennials, a target group with large potential, but difficult to serve due to its fast-changing demands.
But that’s not all. Together with the strong Q4-results, PayPal announced a buyback-program worth $2 billion. That shows management has an eye for its investors. Keep in mind that cash flow-generation is important for (future) distributions to shareholders. And that’s exactly were PayPal beats its peers.
To sum up, PayPal convinces on several important aspects: market position, market growth, competitive advantages, frontrunner in new technology, valuation to peers and cash flow-generation. That makes PayPal a great value.