The Valuentum Best Ideas Newsletter portfolio inherited a position in PayPal (PYPL) following the online payment processor’s split from eBay (EBAY) earlier this year. PayPal’s third-quarter results, the first quarter after the separation, were good. In fact, they were great.
Revenue grew 19% on a non-GAAP currency-neutral basis, and 200 basis points of non-GAAP operating margin improvement helped to drive a 31% increase in non-GAAP earnings per diluted share growth. Expectations for the top-line were a bit rough for the entity to meet, but the bottom-line exceeded consensus. The company noted that during the quarter, it “gained market share, expanded its customer base, and deepened engagement with merchants.” As a merchant, we were hit with higher fees this year, so our firm can attest to PayPal’s dedication to its shareholder base (too bad for us).
PayPal is at the forefront of change. “The rise of mobile technology and the acceleration of money becoming digital” are playing right into the online payment processor’s hands. Total payment volume (TPV) advanced 27% on a currency-neutral basis in the quarter (merchant services TPV grew faster). During the quarter, PayPal processed an incredible 1.22 billion payment transactions and 345 million mobile transactions, the latter up 38% from the year-ago period. The company’s strongest asset is its network effect, augmented by a customer base that keeps growing, 173 million active ones at last count. Each customer is also making more transactions, and merchants continue to sign up for PayPal “in record numbers.”
Shares of PayPal will likely face pressure after the earnings announcement as investors get more comfortable with the company’s fundamental trajectory and sort through standalone results for the first time. The company’s free cash flow generation remains top-notch (it hauled in $519 million of free cash flow in the period), and the company’s cash and non-equity investments totaled a whopping $6.7 billion at the end of September (the company is essentially debt free). Looking ahead, PayPal expects net revenues to jump as much as 18% for 2015 on a non-GAAP currency-neutral basis and non-GAAP earnings per diluted share to come in the range of $1.23-$1.27.
We expect to publish our inaugural report on PayPal soon. The company resides in the Best Ideas Newsletter portfolio.