Thursday, Oct 24th 2019

PayPal Q3 Earnings: Strong Fundamentals at a Bargain Price


Prior investments in consumer experience paid off handsomely for PayPal in its latest fiscal quarter.

On Thursday, PayPal surged more than +8% after releasing a strong Q3 earnings report. The digital payments giant exceeded analyst expectations on both top and bottom lines, while providing a fiscal year profit forecast that blew past Wall Street estimates.

On the fundamental side, the earnings report painted a portrait of a business performing swimmingly on all fronts.

Venmo, which PayPal acquired through its acquisition of Braintree in 2013, is now on pace to deliver more than $100 billion in total payment volume and ~$400 million in run-rate revenue in 2019.

The total price of that 2013 acquisition? Just $800 million.

And despite a slowdown in eBay volumes, total payment volume and revenue growth both actually accelerated through the quarter, to 27% and 19%, respectively.

We felt both of these data points were notable as we believe PayPal is still in the early innings of monetizing its Venmo asset and in capturing all of the latent pricing power in its core business.

And with their recent entry into the Chinese market, we think there's some nice additional upside optionality built in as well.

As a reminder, in September PayPal acquired a controlling stake in GoPay, a deal that would make PayPal the first foreign payments business to be able to offer online payment services in China.

While it certainly will be an uphill battle for PayPal to make a dent into the market dominance of China's two big payments incumbents, we felt this achievement alone was very notable, particularly in a sector as tightly regulated as payments.

At just over ~20x free cash flow for a business poised to compound its earnings at over ~20% annually for years to come (with additional upside optionality), we think PayPal here represents a great value.

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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