On PayPal Holdings Inc. (NYSE: PYPL) following 3Q results, which included a 38% increase in total payment volume and still strong growth in active accounts. Volumes continue to benefit as consumers increased online spending amid shelter-at-home restrictions.
In our view, PayPal continues to actively innovate in the payments space. The company recently expanded its ‘Buy Now Pay Later’ product by introducing short-term installment products in the U.S. and UK. In October, it introduced the Venmo Credit Card (issued by Synchrony), which gives customers cash back on eligible purchases, as well as the ability to manage the card in the Venmo app.
The company has also remained acquisitive, and in January 2020 acquired Honey Science Corp. for $4 billion in cash. Founded in 2012, Honey, with 17 million monthly active users, has an online shopping tool that provides consumers with discounts, a rewards program, and price-tracking tools and alerts. Honey works with about 30,000 online retailers in industries ranging from fashion and technology to travel and pizza delivery. The company believes the acquisition will provide a transformative shopping experience for PayPal consumers, while increasing sales and customer engagement for its merchants. The transaction is expected to be accretive to PayPal’s non-GAAP EPS in 2021. While the $4 billion transaction price is 40-times Honey’s $100 million revenue base, the firm is already profitable, with the potential for vastly greater scale given PayPal’s base of over 350 million active users and 28 million merchants. We also believe that Honey, which has a high percentage of millennial-generation customers, has the potential to improve PayPal’s spending volume by adding to customer engagement.
Turning to recent financials, the company’s 3Q earnings report again demonstrated strong growth in payment volume and in the number of active accounts.
On November 2, PayPal reported adjusted 3Q20 EPS of $1.07, up from $0.51.
In 1Q19, PayPal made a $750 million strategic investment in MercadoLibre, an e-commerce and payments company in Latin America. It also announced a partnership with Instagram, in which payments using Instagram’s new ‘checkout’ feature will be processed in partnership with PayPal.
In November 2018, the company acquired Hyperwallet, which provides payment solutions to e-commerce platforms, for about $400 million in cash. In July, PayPal acquired Simility, which delivers fraud prevention and risk management solutions, for $120 million, and in May it acquired Jetlore, an artificial intelligence-powered prediction platform used by retailers, for about $16 million.
In July 2018, PayPal completed a deal with Synchrony Financial in which Synchrony acquired about $6.8 billion of PYPL’s consumer receivables.
EARNINGS & GROWTH ANALYSIS
On the 3Q earnings call, management reaffirmed its expectation for net new active accounts to increase by 70 million in 2020.
Mobile payment volume growth is also strong.
PayPal is seeing a surge in new accounts as customers divert spending online amid shelter-at-home policies.
For the fourth quarter, it expects total payment volume growth in the low- to mid-30s and revenue growth of 20%-25% (also 20%-25% on an FX-adjusted basis). For the full year, it sees TPV growth of 30%, revenue growth of 20%-21% (21% to 22% FX-adjusted) and non-GAAP earnings growth of 27%-28%.
Reflecting the 3Q earnings beat and continued strong payment volumes, we are raising our 2020 EPS forecast to $3.81 from $3.57, and our 2021 forecast to $4.55 from $4.17.
FINANCIAL STRENGTH & DIVIDEND
PayPal accessed the public debt markets for the first time in 3Q19, raising $5.0 billion in senior fixed-rate notes at favorable interest rates, as it seeks to optimize its capital structure. PayPal issued $4 billion in debt in May 2020 at an effective rate of 2.26%.
In 3Q20, it repurchased 1.8 million shares for $350 million.
PayPal shares are trading about 18% off their 52-week highs, but have still risen about 62% so far in 2020, far outpacing the market as the company benefits from a surge in online spending.
Consistent operating margin improvement also argues for improved valuation.