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Morningstar | PayPal Holds Its Pace in 1Q, Provides Some Venmo Numbers

PayPal delivered a solid first quarter, largely maintaining its strong growth. We continue to believe that the company is well-positioned, given industry trends, but that the current stock price more than fully reflects its prospects. We will maintain our $74 fair value estimate and narrow moat rating.

PayPal’s revenue grew 12% year over year in the quarter, or 19% if we exclude the sale of the U.S. consumer credit receivables portfolio to Synchrony. Active accounts were up 17% year over year, and transactions per active accounts were up 9%. We think the company’s ability to expand on both fronts helps solidify its long-term prospects.

The company provided some new disclosures on Venmo, revealing that the platform has 40 million active accounts, and the annual run rate on transaction volume and revenue is approximately $100 billion and $300 million, respectively. While we think Venmo is an attractive business and it is to management’s credit that they seized upon this opportunity, we think substantial uncertainty surrounds this operation. Venmo’s success has drawn some tough competition from the likes of Zelle, and given the network effects inherent to payment platforms, this tends to be a winner-take-all type of business. There’s no guarantee Venmo will be a long-term leader. Further, while there is still likely a lot of growth in front of Venmo, the current revenue level is not that impactful, representing only about 2% of total revenue. In our view, PayPal’s long-term success continues to hinge primarily on its core business. To this end, though, we think management has demonstrated its ability to adjust well to the evolution of the payment space, and PayPal remains concentrated in the fastest-growth areas.

Operating margins, excluding purchase amortization and one-time charges, declined slightly to 15.8% from 16.0% last year. Longer term, we continue to believe that the company’s strong growth and the scalable nature of the business will allow meaningful margin expansion over time.