Venmo, User Growth, Retail And Bank Partnerships: Analysts Discuss PayPal's Q3

PayPal Holdings Inc. (NASDAQ:PYPL) reported third-quarter earnings after the close Thursday, and shares were surging Friday morning in reaction to the print. 

The Analysts

• Credit Suisse analyst Paul Condra set an Outperform rating and $100 price target.
• Raymond James analyst John Davis reiterated an Outperform rating and $108 price target. 
• William Blair analyst Robert Napoli reiterated an Outperform rating.
• BTIG analyst Mark Palmer upgraded PayPal from Neutral to Buy with a $95 price target.
• Wells Fargo analyst Timothy Willi reiterated an Outperform rating and $101 price target.

Customer Growth

Active customer account growth accelerated from 15.1 percent to 15.5 percent in 2018. Transactions per account increased from 9.5 to 9.7, while Venmo volume rose from 78 percent to 81 percent, said Credit Suisse's Condra. 

Raymond James' Davis said this customer growth win represents a trend that's five quarters long. “On the call, management once again called out weakness in cross border and eBay volumes (up 3 percent vs. 6 percent in the second quarter of 2018) as well as the loss of TIO volume.”

Partnerships

In the quarterly report, PayPal highlighted partnerships with Walmart Inc. (NYSE:WMT) and American Express Company (NYSE:AXP).

The Walmart deal will provide several financial services to PayPal users at Walmart stores, said William Blair's Napoli. 

“These services include cash-in and cash-out services for a $3 fee, access to ATMs and cash balance information at service desks. The relationship furthers PayPal's focus on the movement of money for the underbanked population.”

The AmEx partnership means that PayPal is adding the largest rewards bank to its network, the analyst said.  

“American Express cardholders will now be able to easily pay with rewards points at any merchant that accepts PayPal, a substantial expansion from only a few large merchants.”

Venmo

The most eye-catching aspect of PayPal's earnings report surrounds the progress in monetizing Venmo, said BTIG's Palmer. This initiative is important to the stock’s valuation, as many investors’ future estimates are reliant on the success of the initiative, he said. 

“PYPL reported that 24 percent of Venmo’s users engaged in a monetization event during Q3, up from 17 percent in Q2 and 13 percent in May. That figure made more meaningful the 78-percent increase in volume to $16.7 billion that Venmo reported during Q3, in our view,” the analyst said. 

Wells Fargo's Willi said some examples of a monetized transaction are Pay with Venmo, instant transfers from a Venmo account and using the Venmo card.

“According to PYPL, instant transfer volume from Venmo accounts exceeded $1 billion during the month of September; PYPL recently increased its pricing on instant transfers to 1 percent of the transfer.”

Price Action

PayPal shares were up 8.8 percent at $84.30 at the time of publication Friday. 

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Photo courtesy of PayPal.