PayPal's Plans to Monetize Venmo Are on Schedule
PayPal Holdings Inc (NASDAQ: PYPL) investors had plenty of reasons to cheer when the company recently reported its second quarter earnings.
Revenue for the payment platform increased 18% year over year to $3.14 billion, and non-GAAP EPS increased 27% year over year to $0.46. More importantly, the quarter proved that the company's strategy to make partnerships that offer its account holders more choices are paying off. PayPal increased its active accounts to 210 million, for 12% growth year over year, and these new active accounts averaged 32.3 transactions over the past twelve months, good for a 10% increase year over year.
Even more amazing was the growth of Venmo, the social payment platform that's proving so popular with millennials. The platform processed $8 billion in total payment volume, for an eye-popping 103% year over year increase. During the quarter, PayPal announced Venmo users would soon be able to transfer money from their accounts to eligible debit cards instantly as part of the agreements the company made last year with Mastercard and Visa. While the continued success and growing popularity of Venmo is welcome news, what investors really want to know, however, is when the platform will be able to meaningfully contribute to the company's top and bottom lines. And, on that front, the company had some good news.
Pay with Venmo's big rollout is on schedule
When PayPal released its first quarter earnings, it announced that Pay with Venmo -- the platform that allows users to make purchases with Venmo at retail locations -- was being tested at select locations. It also announced that Pay with Venmo would be introduced to merchants that accept PayPal through the end of the year; a rollout that now appears to be largely on track. This quarter, merchants popular with millennials, including Lululemon Athletica and Forever 21, started accepting the payment method. In the second quarter conference call's opening remarks, provided by S&P Capital IQ, PayPal CEO Dan Schulman said he was "quite encouraged" by the early results.
Though investors grew a bit restless in the interim, PayPal waited patiently to monetize Venmo. The company wanted to wait until it was confident it could do so in a way that wouldn't make the popular platform lose its appeal with its users. In response to an analyst's question during the company's same conference call, COO Bill Ready discussed this process:
This is just the beginning
Elsewhere in the conference call, Schulman echoed Ready's comments when he confirmed Pay with Venmo would be available at "millions" of retailers by "the end of this year." PayPal is confident in its ability to roll out to these merchants because it is using the same launch strategy as it used for its popular One Touch platform. One Touch -- only introduced two summers ago -- is now used by 60 million consumers and 5.5 million merchants. The key to that success was that adding One Touch to a retailer's checkout process required absolutely no effort on the merchant's part. Merchants would simply consent to the platform's use and PayPal would do all the work to make it happen.
As noted above, PayPal's active accounts averaged 32.3 transactions over the trailing twelve months. PayPal wants that number to grow considerably until it reaches two times per week. PayPal's management sees a clear path to get there since Venmo's P2P transactions are not included in that number, meaning that virtually none of Venmo's uses currently count toward PayPal's engagement metrics. With the platform being introduced to millions of locations by the end of the year, user engagement numbers could substantially increase in the coming quarters. If user engagement does spike after Pay with Venmo's launch, current analyst estimates and models could prove to be fairly conservative.
PayPal's shares have already appreciated by almost 50% year-to-date. But, if Pay with Venmo catches on with millennial consumers the same way the platform caught on fire with P2P payments, the stock price might still have a long way to go yet.
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Matthew Cochrane owns shares of Mastercard and PayPal Holdings. The Motley Fool owns shares of and recommends Lululemon Athletica, Mastercard, PayPal Holdings, and Visa. The Motley Fool has a disclosure policy.