Why This Analyst Is Increasingly Convinced Of Venmo's Monetization Prospects

Venmo hasn’t yet proven itself a meaningful contributor to PayPal Holdings Inc PYPL. But one analyst team is increasingly confident about its prospects to monetize and bolster parent earnings.

The Rating

Morgan Stanley analysts James Faucette and Steven Wald maintained an Overweight rating on PayPal with a $129 price target.

The Thesis

Contrary to the analysts’ previous expectations, Venmo has yet to cannibalize PayPal users to a meaningful degree. The brands have so far appealed to distinct demographics for distinct uses. Venmo is not a net negative — and it may yet prove itself a net positive.

“We came out of our meeting with the head of Venmo feeling more optimistic about the monetization opportunity, with merchants today willingly covering marketing/rewards on the network, and other monetizable products queued up,” Faucette and Wald wrote in a note.

Those pipeline products may demonstrate value fairly rapidly and lend stability to the model.

“We came away with the impression that many of Venmo's new initiatives have the potential to grow at the same rate, if not faster, than Venmo's instant transfer offering,” the analysts wrote. “This should eventually move the revenue mix away from instant transfer, which we view as less of a resilient revenue stream.”

They suspect Venmo must pursue merchant integration to achieve “meaningful usage,” while PayPal must increase offline acceptance. The brands’ 2020 rollout of a point-of-service digital wallet is a step in the right direction.

You can check out dozens of up-and-coming fintech companies at the fifth annual Benzinga Global Fintech Awards on Nov. 19 in New York City.

Overall, the product pairing is expected to compete well against fintech peers.

“We see PayPal as the preferred digital wallet option for non-Amazon merchants, evidenced by its online acceptance lead vs. other digital wallets and industry low attrition rates,” Faucette and Wald wrote.

You can check out dozens of up-and-coming fintech companies at the fifth annual Benzinga Global Fintech Awards on Nov. 19 in New York City.

Price Action

At time of publication, shares traded up 1.3% to $102.76.

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