PayPal had a lot of good news for investors with its first-quarter earnings report. The fintech company beat expectations for both revenue and earnings, but one number stood out as particularly strong for PayPal.
Total payment volume increased 3% compared to the fourth quarter. That’s the first time PayPal has shown first-quarter sequential growth in total payment volume since its spinoff from eBay in 2015.
New products leading to user growth and engagement
PayPal added 14.5 million net new active accounts in the first quarter — about 1.4 million merchants and 13.1 million consumers. That represents growth of about 4% in total accounts versus the fourth quarter and 21% year over year.
Importantly, PayPal’s newer users are more engaged than older users, management says. “These have been our most engaged cohorts that we’ve ever seen. And we’re continuing to see those trends,” CFO John Rainey said during PayPal’s first quarter earnings call. Daily active users increased 33% year over year, Schulman said. That’s considerably faster than the 21% growth rate in total accounts.
PayPal released several new products over the last year that have helped drive user growth and engagement.
Over 5 million people have used PayPal’s Buy Now, Pay Later service since it launched in August of last year. And it’s successfully driving repeat users, having done over 14 million loans in that time for total payment volume of $2 billion. Buy Now, Pay Later is a valuable driver of engagement because it requires users to keep coming back to PayPal to pay their installments.
Additionally, PayPal has seen great success with using cryptocurrency trading to drive engagement. About half of cryptocurrency users check the PayPal app every day, Schulman said. The early success in crypto lends credence to PayPal’s strategy of becoming a financial super app.
Another area of customer acquisition and engagement is in-store payments. PayPal users can pay in-store using a debit card linked to their PayPal or Venmo account, a co-branded credit card, a QR code, or using tap-to-pay through the PayPal app. Management said it saw $6.4 billion in payment volume from in-store transactions during the first quarter. Total in-store volume was $20 billion for 2020.
PayPal users that adopt one of its in-store payments options are making 60 to 120 more transactions per year than other users, CEO Dan Schulman said on the earnings call.
Some footnotes for investors to consider
PayPal’s sequential growth in payment volume is nothing short of spectacular. However, there are a couple of things investors need to consider that may temper their excitement.
First of all, the government issued another round of stimulus checks at the start of January, which led to an increase in online shopping, management said. Rainey described it as an extension of the holiday shopping season. Investors shouldn’t expect Uncle Sam to hand out Christmas checks again next year.
Second, transaction volume in the first quarter was slightly different than in the fourth quarter. Transactions leaned more heavily toward lower take-rate products, such as Bill Pay. As a result, PayPal’s transaction revenue actually declined 1% sequentially despite total payment volume increasing.
One of the biggest factors affecting the decline in take rate was eBay’s shift to managed payments, which accelerated faster than PayPal’s management anticipated. Management said the changes at eBay led to an 8 basis point decline in its take rate, about one-third of the total change. On the other hand, PayPal’s total payment volume grew despite the loss of more eBay sales than anticipated.
PayPal’s more focused on transaction margin, which improved to 57.8% in the first quarter. That’s up from 55.9% in the fourth quarter and 49.5% in the first quarter last year. So, the margin expansion more than offsets the small sequential decline in transaction revenue.
Going forward, management expects the rapid growth among its network of 31 million merchants to more than offset the accelerated decline of transaction processing at eBay. Meanwhile, it’s growing engagement from a global consumer user base. As such, the fintech stock is well-positioned to continue impressing investors.
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