Venmo Monetization Means PayPal Is A Buy

• The share price of Paypal Holdings Inc PYPL has appreciated 13.24 percent in the last month, reaching a high of $36.57 on Wednesday.
• Compass Point’s Michael Tarkan has reiterated a Buy rating and price target of $45 on the company.
• While the company reported “noisy” 3Q15 results, PayPal expects to begin the monetization of its Venmo brand in 4Q15.

Analyst Michael Tarkan reported that “a lower take rate and unfavorable foreign currency was offset by strong expense control and a lower than expected tax rate” during 3Q15. PayPal reported revenue growth of 19 percent, with margin expansion of 200bps and robust free cash flow for the quarter.

Tarkan believes that PayPal’s “outsized growth, strong global brand, and well-built balance sheet position it favorably to benefit from the ongoing secular shift towards e-commerce, despite increasing competition within each of its core segments.”

Related Link: This Top-Rated Internet Analyst Sees 'Confident Tone, Solid Results' From PayPal

For Q3, the company reported its EPS ahead of the estimate and the consensus, while revenues beat the estimates but missed the consensus. Total payment volume rose 27 percent on an FX-neutral basis from the 3Q14 levels, while transactions rose 25 percent year-on-year. The take rate declined, while operating expenses increased.

Management reiterated its 2015 guidance, although they were “biased towards the top end of the range.” With Braintree having recently crossed the $50 billion mark in payment volumes and the Venmo unit having processed payments worth $2.1 billion in 3Q15, the monetization of the latter is set to begin.

PayPal intends to start a pilot program in 4Q15 “to allow Venmo customers to pay with Venmo at selected merchants, with a full rollout expected by year-end 2016.” Tarkan expects the take rates from this initiative to be identical to the current take rates.