PayPal stock falls after outlook miss, but CEO says Venmo has hit a ‘significant transition point’
A few quarters ago, PayPal Holdings Inc.’s disclosures of its rapid Venmo volume growth came as somewhat of a mixed blessing, since the popular peer-to-peer payment service was a hefty source of losses for the company overall. Venmo still isn’t profitable, but the narrative around the service is starting to change.
PayPal PYPL, +1.43% disclosed in its fourth-quarter earnings report Wednesday that Venmo revenue was tracking at an annual run rate of more than $200 million headed into 2019, with about half of that money coming from the instant cash-out service and the other half coming from various merchant-related services including a Venmo debit card. Contributions from Venmo are still a small piece of the overall business — for context, PayPal generated $4.2 billion in overall revenue last quarter, and $15.5 billion in all of 2018 — but analysts are becoming more upbeat about trends at the peer-to-peer service.
Read: PayPal keeps streak of earnings beats alive following best-ever quarter for account growth
Chief Executive Dan Schulman told MarketWatch that Venmo has hit “a significant transition point” in that it is starting to bring in a “meaningful” amount of revenue. “Even as you move to break-even, Venmo adds incremental profitability to the business because we’re not absorbing incremental losses,” he said.
BTIG analyst Mark Palmer called PayPal’s recent discussion of Venmo “perhaps most encouraging” of the company’s quarterly highlights. In particular, he was struck by the announcement that 29% of Venmo users have engaged in a “monetizable” experience to date, up from 24% in the third quarter and 17% in the second quarter.
“That figure made even more meaningful the 80% increase in volume to $19 billion that Venmo reported during 4Q18, in our view,” he wrote in a note to clients.
The 80% growth in volume for the fourth quarter compares with an 78% rise in the third quarter, which Jefferies analyst John Hecht called an “impressive sequential acceleration.”
PayPal shares were down about 4% in after-hours trading, as the company’s first-quarter revenue outlook missed expectations, in part due to weakness at eBay Inc. EBAY, +1.16% , PayPal’s former parent company. The online-payments pioneer announced Wednesday that Venmo volume exceeded the eBay volume on its platform during the quarter, and Schulman told MarketWatch that the eBay slowdown was in fact a good thing for PayPal. Volume from eBay was flat during the quarter.
PayPal has been the dominant payment method on eBay’s site since the two companies split in 2015, but eBay announced about a year ago that it planned to move toward “managed payments” once a contract between the two companies expires in 2020. The change means that PayPal will be relegated to a lesser role on the eBay platform, and Wall Street has worried about the dropoff in PayPal’s revenue that will occur when the eBay agreement ends.
Since the two companies announced the impending change to their relationship, PayPal has been trying to de-emphasize the importance of eBay to its overall business, which has coincided with a generally weak stretch for the e-commerce site.
“In many ways the slowing of eBay, because we can cover with other things, is actually a positive thing because eBay is becoming a smaller part of PayPal, and more rapidly than others anticipated,” Schulman said after the earnings call. He argued that while there’s concern about what will happen when the agreement shifts, “the reality is they’re now 10% of our volume, down from 27% a few years ago, and will be mid-single digits by the time we get to that place.”
BTIG’s Palmer said that the fact that PayPal’s “merchant services” businesses has grown revenue at six times the rate of PayPal’s eBay revenue since 2015 “should help to ease whatever sting remains from eBay’s decision announced last January to replace PayPal with Adyen NV ADYEN, -1.28% as its primary payments provider in 2020.”
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