The second quarter of 2020 was PayPal Holdings' (NASDAQ: PYPL) strongest since separating from eBay five years ago. Consumer behavior has shifted to digital payments in recent months amid the coronavirus pandemic, and that trend powered PayPal's stellar results.
Revenue growth clocked in at 25% year over year on a currency-neutral basis. That represented a sharp acceleration over the 15% revenue growth in full-year 2019.
PayPal had previously withdrawn full-year guidance over the uncertainty caused by the pandemic, but management now sees a clearer path forward. Its reinstated guidance now calls for full-year revenue and adjusted earnings to increase approximately 22% and 25%, respectively.
But the most impressive number in the outlook is new active customer accounts. PayPal expects to add 70 million customers to its digital payment platform in 2020. To put that into perspective, that's nearly as many customers as PayPal added between 2017 and 2019, when a total of 76 million users signed up over that span.
As we'll review, PayPal has growth momentum going into the third quarter, and management is moving quickly to capitalize on the acceleration toward a digital economy.
Revenue growth accelerated into the third quarter
"In the midst of the COVID pandemic, we have seen substantial macro changes that we believe will have a lasting and profoundly positive impact on our business," CEO Dan Schulman said during the second-quarter conference call.
Total transactions grew 26% across PayPal's platform in the quarter, reaching 3.7 billion, and that fueled total payment volume growth of 30% year over year to $222 billion. That level of activity is consistent with the volumes PayPal usually sees during the five days between Thanksgiving and Cyber Monday, except this time the heightened activity was happening for a whole quarter. More importantly, transaction growth accelerated each month during the quarter with the highest level in June. This means momentum was still gaining steam even as businesses reopened, which will spill over to the third quarter.
Management expects third-quarter revenue to be up approximately 25% year over year adjusted for currency exchange, consistent with full-year guidance. And it's possible PayPal may beat that number. During the call, Schulman said, "Revenues continue to outperform our expectations with year-over-year growth rates of greater than 60% during the first three weeks of July."
It's PayPal's time to shine
PayPal added 21.3 million customer accounts in the second quarter, up 137% year over year. This growth is happening as the penetration of e-commerce as a percentage of retail sales in the first half of 2020 outpaced external forecasts by three to five years, Schulman said.
The company is moving swiftly to capitalize on this tectonic shift in the economy. For starters, it is accelerating in-store contactless payments, which have taken on greater importance in recent months, since consumers don't want to physically touch even a dollar bill at checkout anymore.
"We are significantly investing to accelerate our presence in all forms of omnichannel commerce from the point of sale in-store, to buy online and pick-up in-store, order ahead, pay at the table, and home delivery," Schulman said.
PayPal is also playing a lead role in introducing QR code functionality at the point of sale in the U.S. PayPal's 2018 acquisition of iZettle is coming in handy here. With iZettle's contactless cards and integration with Alphabet's Google Pay and Samsung Pay, PayPal now has QR code functionality available in 28 countries for small businesses.
Those are just a few examples of how PayPal is positioning for the new digital economy. With Venmo, BillPay, and the recent acquisition of Honey Science, it has all the tools to facilitate a cashless society.
PayPal ended the second quarter with 346 million active customer accounts. Management believes it can reach one billion customers over the long term with the pandemic resulting in a wider path for PayPal to reach its long-term growth goals.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Ballard owns shares of PayPal Holdings. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and PayPal Holdings. The Motley Fool recommends eBay and recommends the following options: short January 2021 $37 calls on eBay, long January 2022 $75 calls on PayPal Holdings, and long January 2021 $18 calls on eBay. The Motley Fool has a disclosure policy.
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