The Most Important Number From PayPal's 2nd Quarter

PayPal Holdings Inc. (NASDAQ: PYPL) shares dipped a few percentage points when the company announced its second-quarter earnings results , but a review of the quarter reveals little that long-term-minded shareholders need to be concerned about. In the quarter, revenue grew 23% to $3.86 billion, and adjusted earnings per share (EPS) rose 28% to $0.58.

Perhaps even better than the robust top- and bottom-line growth , however, is the increasing expansion of the company's core digital payments platform. In Q2, PayPal's active user accounts rose to 244 million, a 15% year-over-year increase. Since it reported earnings three months ago, the company added 7.7 million new accounts. While that's obviously great news, what stood out the most to me was how often these new users were engaging with the platform. Over the past 12 months, active users have used the platform to make 35.7 transactions per account, a 9% increase year over year, and marking a slight, but noticeable, acceleration of growth in this key category.

PayPal Metrics Q2 2018 Q2 2017 Change
Revenue $3.86 billion $3.14 billion 23%
Adjusted EPS $0.58 $0.46 28%
Active accounts 244 million 212 million 15%
Transactions per active account 35.7 32.8 9%
One Touch consumer accounts 102 million 60 million 70%

Data source: PayPal Holdings Inc.

What's driving user engagement?

When asked what was driving this acceleration in growth of user engagement in the conference call , CEO Dan Schulman highlighted a few things he thought were boosting the number:

We've got a number of tailwinds around engagement. First of all, I think our customer experiences are better than they've ever been before. You look at One Touch, its conversion rate ... Choice is leading to more engagement. ... The Venmo card is going to lead to more engagement. We have the PayPal Cash Card, that's going to lead to more engagement. ... And so I think we're going to continue to see engagement grow at a nice clip going forward. And I think it bodes well, obviously, to have both more customers coming on than ever before, using this service more than they ever have.

Schulman specifically calls out three things he believes will drive account holders' engagement with the digital payments platform: PayPal's customer choice initiatives , the popularity of One Touch, and the introduction of new card products. Let's take a closer look at all three to see exactly what PayPal is doing in these areas and if these reasons hold water.

Person looks at PayPal's app display on a smartphone screen.

PayPal's mobile payment volume increased to $54 billion and now accounts for 39% of PayPal's total payment volume. Image source: PayPal Holdings Inc.

PayPal's customer choice initiatives

Soon after PayPal was spun off from eBay about three years ago, the company announced dozens of new partnerships with a number of banks, credit card networks, and other financial institutions. With these partnerships in place, PayPal users gained the ability to use the platform in a variety of previously unavailable ways, including linking their PayPal account from within their bank's existing online and mobile portals and redeeming credit card rewards directly to their PayPal accounts. In addition, users could much more easily choose which bank account, debit card, or credit card they wanted to use for each transaction.

For instance, this quarter PayPal announced a new partnership with the South Korean credit card issuer ShinhanCard, that country's largest card issuer. The agreement allows ShinhanCard holders to open a PayPal account from within the ShinhanCard app and receive rewards for using PayPal.

These initiatives are clearly resonating with customers and making it easier for account holders to engage with the platform. CFO John Rainey said the customer service department experienced a record low contact rate in Q2, resulting in considerable cost savings for the company.

One Touch's growing popularity

One Touch is the platform that allows PayPal users to register a given device with their PayPal account, making it unnecessary to log into PayPal for future transactions. When customers use this platform, they no longer need to spend time on burdensome tasks such as entering shipping addresses, credit card numbers, and expiration dates every time they make a purchase on an app or website. This becomes especially relevant in light of the growing volume of mobile commerce, as the small screens of smartphones make it particularly easy for potential customers to abandon purchases before completing the checkout process.

Unsurprisingly, then, mobile commerce is an area where PayPal is excelling. In Q2, mobile payment volume grew to $54 billion, an incredible 49% year-over-year increase, representing 39% of PayPal's total payment volume. One Touch continues to grow too, boasting 102 million consumers and 9.5 million merchants.

New card products

While PayPal is a digital payments platform, the company also recognizes that the war on cash needs to be waged on all fronts, which is why the company has launched new cards, allowing account holders to use their accounts in more ways. PayPal's new Venmo card allows users to make purchases everywhere Mastercard is accepted in the U.S., including online purchases, in-store transactions, and ATM withdrawals. The PayPal Cash Mastercard targets the underbanked segment of the population and comes with no monthly fees, no account minimum, and no credit check needed to open an account. In addition to using the card for online and in-store purchases and ATM withdrawals, users can deposit money into their accounts via direct deposit. In both cases, these cards open up entirely new ways for users to engage with the respective platforms.

Are the shares too expensive?

Some investors might think PayPal's shares are richly valued at these prices, and that's fair criticism. Based on its trailing-12-month EPS of $2.16, shares sport a P/E ratio of 39.6. That's certainly expensive, even for a company growing EPS by 28%. Yet with more users on the platform, and those users actually using the platform more than ever before, I don't think shares are too expensive to consider an investment at this point.

The digitization of money is a long-term secular trend that is still in the early innings. Schulman believes the total addressable market is upwards of $100 trillion with more than enough room for multiple winners in the space. While that may be true, PayPal has clearly established a dominant position in this growing market. With a growing user base that becomes more attuned to the platform every quarter, I think PayPal's best days might still be ahead of it.

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Matthew Cochrane owns shares of Mastercard and PayPal Holdings. The Motley Fool owns shares of and recommends Mastercard and PayPal Holdings. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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