PayPal’s (PYPL) growth has been unchecked since March, with shares rising over 130% on e-commerce and contactless payment tailwinds. PayPal has been a solid beneficiary of the shift to e-commerce shopping and should continue to do so as the holiday season nears. Given that we still have not yet gotten significantly closer to a vaccine, and that major stores are closing doors temporarily for BFCM shopping, e-commerce is expected to surge, and with that, PayPal could find more significant tailwinds and growth.
PayPal already generates a significant share of digital payments and is continually growing its reach as well, reflected by its highest TPV yet during the previous quarter. TPV grew 29% to $222 billion, with merchant services (top marketplaces/platforms) delivering 92% growth ahead of eBay’s (EBAY) 34%, aided by a recovery in cross border trade TPV.
As Q3 is winding down to its final weeks, the next focus comes down to the heavy-hitting holiday season, not just for traditional retailers, but for e-commerce names too. For 2019, e-commerce holiday sales were $137.6 billion, representing ~14% of total retail sales; however, it is estimated that up to 30% of holiday sales in 2020 could be driven by e-commerce, leaving significant room for PayPal to benefit. KBW has already named PayPal as the best idea for 2H due to these e-commerce tailwinds for the holidays.
Prior shifts to e-commerce boosted PayPal’s active users as well as payment volumes for 1H. PayPal saw active accounts grow from 305 million in Q4 19 to 346 million by the end of Q2 20, with both Q1 and Q2 adding 20.2 million and 21.3 million. For comparison, PayPal only added 9 million accounts in Q2 2019, so 2020 saw Q2’s active accounts double, helped by the recent acquisition of Honey.
As PayPal is growing active accounts at a faster clip now than during the previous year, payment transactions in a seasonally higher holiday Q4 should benefit tremendously.
Source: Investor Presentation
While Q1 showed weak payment transactions due to extremely hard hit travel and event-related transactions, Q2 reflected a strong rise by YoY and QoQ. But there was still “~47% fewer travel and event transactions” for Q2 20 compared to Q2 19. So while travel and events still have yet to recover, PayPal already has shown recovery in payment transactions.
Carrying this over to the holiday season shows a substantial area of growth. PayPal is already expecting significant growth to remain for 2H – 70 million more accounts expected to be added, TPV growth of 30%, and revenue guidance at 25%. Q2 saw nearly a quarter of a million new accounts added daily, and 37% growth in DAU – this is basically “‘Cyber 5’-like usage for an entire quarter.” Q3 and Q4 are expected to see up to 300,000 or more new accounts added daily and similar growth in DAU from holiday shopping tailwinds. Cyber-5 like usage for Q2 will be trounced by the actual Cyber-5 usage, as dozens of stores are already planning to be closed for Thanksgiving sales.
Converting the expected growth to payment transactions and TPV points to historically large quarters ahead for PayPal. Active accounts could hit 425 million by year-end, and PayPal is likely to retain a good proportion of new adds due to high average payment volume per user (39.2 transactions) as well as loyalty benefits, cash-back and rewards, and a new interest-free installment payment option.
PayPal’s installments will be available for purchases ranging from $30 to $600, and will last a six-week period. It’s seeking to “help merchants drive conversion, revenue and customer loyalty without taking on additional risk or paying any additional fees” and while that does up the credit risk a bit, it’s likely to see far more usage in holiday sales on potentially squeezed disposable incomes for many.
With active accounts expected to soar past 400 million, payment transaction volume should reach 4.5 billion by Q4, for a YoY growth of 29%. TPV should float up to ~$260 billion by Q4 based on user growth and expected TPV growth rates. Given that, PayPal is expecting to see quarterly revenue at or near $6.2 billion by Q4.
But the tailwinds from e-commerce shopping are likely to be significant, and potentially larger than PayPal is expecting – logistics operators like FedEx (NYSE:FDX), UPS and the USPS have already increased surcharges for higher volumes. More products are expected to be shipped, aligning with the estimated surge in e-commerce as a percentage of total retail sales.
E-commerce could generate up to $300 billion in total sales this holiday season – that leaves incredible room for PayPal to benefit, as card-not-present transactions have already seen positive growth since May, which is a solid indicator for e-commerce growth.
Should e-commerce find that sort of surge, PayPal’s expected TPV near $260 billion could actually rise to $280 billion, and payment volume could push 5 billion – active accounts might float up to 430 million or 440 million, but that might be a stretch. Revenues could reach almost $7 billion for Q4 in a best-case scenario. With these potentially substantial drivers associated with e-commerce holiday sales, PayPal could find EPS in the $4.05-4.15 range for the fiscal year.
PayPal has a top-of-the-line system in place that will allow it to capture significant traffic from holiday sales. Aside from powering check-outs on a majority of sites, PayPal offers purchase protection for buyers and sellers and the new installment purchasing plan. This will help facilitate online transactions and ensure that both merchants and customers are satisfied.
However, as we are seeing currently, tech is falling quite rapidly with the NASDAQ down 1,200 in two days by early Friday trading – PayPal won’t be immune to further sell-offs in tech, which could be a larger risk to take. Also, credit card companies like Visa (V), Mastercard (MA), and American Express (AXP), to name some, will also generate a fair share of payments during the holiday season, and could pressure PayPal to a degree.
Overall, PayPal should emerge as a key player this holiday season as the retail dynamic looks to be shifting rapidly towards e-commerce for the Cyber-5 shopping weekend. PayPal already witnessed Cyber-5 like usage for Q2 and forecast a strong 2H; however, the ever-increasing shift to online retail sales might surpass PayPal’s strong estimates, and see the company generating record quarterly revenues near $7 billion (as active accounts pass 420 million). PayPal’s offerings of installments, buyer and seller protection, loyalty rewards and cash-back help keep customer engagement rising, fueling higher average transactions per account, and a higher overall payment volume will speak numbers for PayPal’s TPV growth. A strong 2H and holiday season will give PayPal a huge catalyst going into 2021.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Originally published on Seeking Alpha