Thursday, Oct 18th 2018

PayPal +7% on earnings


PayPal has kicked off earnings season with a bang, up 7% after-hours on Thursday after reporting a strong Q3 earnings, beating expectations on both revenue ($3.7B) and profits.

Remember: the business generates revenue from transaction volume on PayPal's sites, multiplied by its "take rate" on those transactions (i.e. the % PYPL takes from each dollar transacted).

Hence the two key things to track along at home with PYPL are (1) how the company is growing transactions with both everyday consumers and businesses and (2) how much profit it's making from those transactions.

The positives: During this past quarter both items came in strong.

On (1), the company ended the quarter with over 250M accounts (+15%) and 2.5 billion transactions (+27%).

On (2), adjusted profit margins expanded to 21% (so they didn't have to sacrifice profits for growth).

The negatives: PYPL has an amazing under-monetized asset in its war chest called Venmo (the social payments platform). Venmo has processed over $50B in transactions during the last 12 months (!!).

The company still needs to figure out how it will use this service to generate more cash flow. Perhaps as a lead generator for other PayPal products to millennials?

We remain excited about PYPL because it's strongly positioned to ride the mega tailwind of e-Commerce growth (read the full thesis in the app). Simply put more people and businesses are transacting online. PayPal is arguably one of the most convenient ways to do that.

PYPL is also a large position of famed hedge fund manager Dan Loeb at Third Point. They see the stock rising to $125+ within 18 months.

Also under-appreciated about PYPL: it's a magnet for technology talent. This reveals itself in less public ways.

For instance, PYPL has the highest mobile growth vs. competitors (+45% this quarter). Merchants love this, and hence are willing to adopt PayPal more. Credit here goes to the world-class engineering team PYPL has.

As of this writing, PYPL was a portfolio holding of Titan. This security may cease to be a portfolio holding at some point in the future.
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