PayPal’s [PYPL] Q1 earnings easily beat analyst expectations. Earnings and active users were both up in the quarter, helping the share price to close out the week near an all-time high.
With one wealth manager revising its price target upwards, it looks like investors are backing the stock this year after a rough end to 2018.PayPal 1-year share price performance, CMC Markets, 29 April 2019
But does a decline in its business from eBay [EBAY] point to longer-term problem for PayPal’s share price?
How PayPal performed in Q1 2018
PayPal saw Q1 2018 net income come in at $667 million, a 31% jump from the previous quarter. Earnings per share was $0.78, beating the $0.68 analysts had predicted. Revenue came in at $4.13bn, up 12% and in line with expectations.
Active accounts came in at 9.3 million for the quarter. This is a 15% increase on the same quarter last year, taking total active accounts to 277 million.
|PE ratio (TTM)||59.79|
|Return on Equity (TTM)||14.85%|
PayPal stock vitals, Yahoo finance, 29 April 2019
The big metric investors were looking out for was total payment volume - a key measure of PayPal's overall revenue and earnings performance. Coming in at $161 billion, this was 25% higher than last year’s quarter, but a miss on the $163 billion expected.
PayPal's share price is now up 23% since the start of the year, and up 44% since this time last year. At the close of last week, the stock was trading near its all-time high at $110.56.
First look at Venmo user numbers
In the results, PayPal revealed that its app-based payments platform Venmo has 40 million users worldwide - that's more than most big banks.
Venmo saw payment volume grow 73% compared to the same quarter last year. The app is now expected to deliver $300 billion in yearly revenue for PayPal.
“Venmo continues its significant momentum. As user growth continues to accelerate, merchants are increasingly turning to Venmo as a way to attract a valuable and engaged consumer base,” PayPal CEO Dan Schulman said during the earnings announcement.
The trick will be for PayPal to monetise Venmo and make a profit from this large user base, but how this is going to happen still isn’t clear. John Rainey, PayPal CFO, had suggested that “roughly one in four Venmo customers are using Venmo in a way today that we’re able to monetize”, in an interview with ‘Mad Money’ host Jim Cramer at the end of last year. And as talks with Synchrony Financial over a bid to capitalise on PayPal’s extensive user base via the credit card market, continue, PYPL bulls will look on with bated breath.
“Venmo continues its significant momentum. As user growth continues to accelerate, merchants are increasingly turning to Venmo as a way to attract a valuable and engaged consumer base” - PayPal CEO Dan Schulman
Business from eBay drops
Tucked under the heading 'PayPal's key business drivers', eBay Marketplace’s volume declined 4% for the quarter. Total payment volume from eBay came in at 9.7% of PayPal's payments. Last year this figure was 12.7%.
Any drop in total payment volume is a big concern for PayPal. So to offset the loss of business from eBay, PayPal has partnered with Instagram.
The partnership will see PayPal process buyer and seller transaction on Instagram’s emergent checkout experience. But with Instagram's checkout process still in its infancy, this is unlikely to fill the eBay shaped hole in near-term future results.
Expectations for full year 2019
For Q2, PayPal is forecasting revenue of between $4.30 billion to $4.34 billion. Expectations are that earnings come in at between $0.50 to $0.52 per share.
Forecasted revenue for Q2 2019
Looking at the full year, PayPal has set revenue guidance of between $17.85 billion and $18 billion. Earnings per share are expected to come in at $2.94 to $3.01.
Analysts at Raymond James are optimistic. After the results the firm upped its price target for the stock from $104 to $116. This represents an upside of around 5%.
Longer-term, PayPal will need to find a way to replace eBay revenue. Predictions are that the loss from eBay will see a 4% to 5% drop in yearly earnings. Venmo would be the likely candidate to fill the gap, but PayPal CFO John Rainey has stated it could take a couple of quarters before the app turns a profit. With eBay set to relegate PayPal’s status next year, this can’t come soon enough.