PayPal Earnings Preview: Will It Keep Up the Momentum?

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PayPal Holdings (NASDAQ: PYPL) is scheduled to report its fourth-quarter results on Jan. 31 after market close. PayPal has historically been a very consistent performer, so investors shouldn't expect any surprises other than continued strong growth for the mobile payment provider.

Guidance and key metrics to watch

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Management is calling for revenue to grow between 20% and 22% year over year, which is higher than last year's fourth-quarter growth of 19%. For non-GAAP earnings per share, management is calling for growth between 19% and 24% over the year-ago quarter.

PayPal continues to streamline its platform, making it easier for new customers to sign up. Management expects to close the year with 227 million active customer accounts, a growth of 15% over 2016.

PayPal's strategy to partner with merchants and major credit card providers is winning new customers. The real bonus for PayPal is that as customers engage with PayPal's platform, they are gradually using it more frequently, which doubles the impact of customer account growth. In the third quarter, customers used their accounts an average of 32.8 times for the trailing-12-month period, up 9% from the previous year.

The combined growth in customer accounts and engagement helped growth in total payment volume accelerate about 300 basis points (on a currency neutral basis) to 29% in the third quarter. Looking ahead into 2018, management expects volume to continue growing at a mid- to high 20% rate.

Right now, customers use their accounts about once every two weeks, but management's long-term goal is to encourage customers to use their accounts two times per week. Management believes this goal is within reach given the company's current momentum stemming from partnerships and growth in PayPal's peer-to-peer payment service, Venmo.

Watch momentum in merchant account growth and Venmo

Growth in merchant services is a key area for investor to watch as PayPal continues to expand its merchant base. Williams-Sonoma, Nintendo, and Microsoft's Skype all made agreements last quarter to offer PayPal to their customers. PayPal also extended its relationship with Mastercard around the world. PayPal's platform has spread to a base of more than 17 million merchants, and is growing.

Building relationships with merchant partners is a crucial pillar for PayPal's strategy to begin monetizing Venmo, which hasn't generated much revenue and has been a drag on PayPal's margins. This is one reason why PayPal's revenue growth is less than its growth in total payment volume.

Venmo processed about $30 billion of total payment volume over the trailing-12-month period, and it's been consistently posting growth of more than 100% year over year. The more Venmo grows, the stronger its network-effect advantage becomes, since a large pull for its users is the ability to share transactions in the app's social feed, which in turn makes the service more engaging for those who use it.

And investors should listen for any specifics from management about the recent deal with Synchrony Financial, in which PayPal received $6 billion in exchange for its U.S. consumer credit receivables portfolio. This deal de-risks PayPal's balance sheet, and at the same time frees up ample cash flow for management to invest in higher-return projects, as well as potential share repurchases and dividends.

Foolish final thoughts

PayPal's brand is continuing to spread everywhere.

Literally.

With a recent PayPal survey revealing that 46% of Americans expected to shop from the toilet during the holidays -- up from 22% in 2016 -- you know the conversion to mobile payments is in full swing and could set up a really strong quarter for the mobile payments leader.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. John Ballard owns shares of Nintendo and PayPal Holdings. The Motley Fool owns shares of and recommends Mastercard and PayPal Holdings. The Motley Fool recommends Synchrony Financial and Williams-Sonoma. The Motley Fool has a disclosure policy.

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