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PayPal Calms Investor Fears by Soundly Thrashing Q3 Expectations

Expectations were muted going into PayPal's (NASDAQ: PYPL) third-quarter financial release Wednesday afternoon. After reaching all-time stock price highs prior to its previous earnings report in June, stock for the digital payments giant cratered after lowering its full-year guidance. PayPal expanded the scope of several big product implementations, which delayed their completion and put off certain price changes. In the weeks and months that followed, PayPal stock declined by 20%.

The company stuck to its plans and, in its latest release, reported results that were better than expected, effectively silencing detractors. Investors responded by driving shares up about 8% following its earnings release.

PayPal reported revenue of $4.38 billion, up 19% year over year, at the high end of management's guidance and surpassing analysts' consensus estimates of $4.35 billion. Revenue was driven higher by both strong transactions growth and increased total payment volume (TPV).

The PayPal logo outside the company's headquarters.

Image source: PayPal.

Expanding profits

Adjusted operating margins of 23.4% climbed from 21.4% during the prior-year quarter, helping to push profits above expectations. Excluding the impact of the company's strategic investments, PayPal delivered adjusted earnings per share (EPS) of $0.76, eclipsing management's forecast for $0.70 at the midpoint of its guidance. The results also topped investor expectations of $0.65.

In a regulatory filing earlier this month, PayPal revealed that its EPS would suffer a $0.15-per-share decline from its strategic investments. The largest contributors to this were its stakes in Uber and MercadoLibre, whose shares fell by 34% and 10%, respectively, during the quarter.

Continuing operational excellence

As in previous quarters, PayPal continued to execute on its game plan, expanding its reach in the digital-payments arena.

The company added 9.8 million net new active accounts -- a record for the third quarter -- compared to an increase of 9.1 million in the prior-year quarter, a bump of 8% year over year. PayPal ended the quarter with a total of 295 million active accounts, up 16% compared to the year-ago period. This includes 23 million merchant accounts, increasing PayPal's network effect. The company's increasing customer engagement also saw continued success. Transactions per active account over the trailing-12-month period grew to 39.8, up 9% year over year.

PayPal's payment's business continued its relentless trek higher. The company reported that for the first time ever, it processed more than 1 billion transactions in each month of the quarter. In all, PayPal processed 3.1 billion transactions, climbing 25% year over year and up 3% sequentially, driven higher by mobile growth, with its One Touch feature used by 172 million customers and 13.8 million merchants.

TPV, which measures the total dollar value of transactions processed by PayPal during the quarter, continued to climb, reaching $179 billion, up 25% year over year. Excluding the impact of foreign currency exchange headwinds, TPV would have increased 27%. eBay continues to decline as a percentage of PayPal's business, dropping 3% year over year, and now represents just 8% of TPV.

Another area of strong growth was person-to-person (P2P) payments, which soared to $51 billion, up 39% compared to the prior-year quarter. P2P now represents 28% of TPV, up from 25% this time last year. Venmo led the way, accounting for $27 billion of TPV, up more than 64%, and its annual run rate now exceeds $100 billion.

More new opportunities

Last month, PayPal announced it had received regulatory approval from China to acquire a 70% equity interest in GoPay -- becoming the first non-Chinese payments company to be licensed to provide online payment services in China. On the Q3 conference call, CEO Dan Schulman said, "This is a very significant development for us and it has the potential to dramatically expand our total addressable market and our long-term growth prospects." He cited the opportunity to expand existing partnerships and forge new ones with China's financial institutions and technology platforms.

The company also recently expanded its partnership with Synchrony Financial (NYSE: SYF). Investors will recall that PayPal sold its portfolio of customer receivables to Synchrony last year. Now the financial institution will be the exclusive issuer of a Venmo co-branded credit card in the U.S., which is expected to launch in the second half of 2020.

What the future could hold

For the upcoming fourth quarter, PayPal is forecasting revenue in a range of $4.89 billion and $4.95 billion, which would represent growth of between 16% and 17%. The company is also anticipating adjusted EPS of $0.82 at the midpoint of its guidance, excluding the impact of its strategic investments. To put this into the context of Wall Street sentiment, analysts' consensus estimates are calling for revenue of $4.94 billion and adjusted EPS of $0.81, both near the high end of management's guidance.

PayPal has largely restored investor confidence, which was shaken when the company reduced its full-year guidance last quarter. PayPal is embracing new opportunities while effectively executing on its existing business, which bodes well for the company's shareholders.

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Danny Vena owns shares of MercadoLibre and PayPal Holdings. The Motley Fool owns shares of and recommends MercadoLibre and PayPal Holdings. The Motley Fool recommends Uber Technologies. 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.

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