PayPal had a tough third quarter. The company slightly missed FQ3'21 revenue due to eBay transition, guided down FQ4'21 for supply chain disruption, and expected 2022 to grow 18% YoY, well below the consensus of 21%. The management expected FQ1'22 to be the most challenging quarter, while the growth will likely accelerate for the rest of the year. The stock was nonetheless down 8.6% for the week and 32.4% from its recent peak.
Despite these headwinds, we reckon the long-term thesis for PayPal to remain intact. The current weakness represents a rare buying opportunity. While PayPal has many businesses on its platform, its revenue model depends mainly on four variables: active users, engagement, the average amount per transaction, and take-rates. All four metrics were heading in the right direction from what we can see.
Active users: PayPal added 13.0 million new users in FQ3'21 and would add 55 million new users for 2021, which is lower than 72.5 million added in 2020 but well above 37.4 million added in 2019. PayPal has a long runway for penetration, given its insignificant presence in Asia and LATAM market. PayPal can use its vast financial resource to boost users through acquisition, such as the recent $2.7 billion acquisition of Paidy, a Japan BNPL player.
Engagement: The number of payment transactions per account is 44.2 times per year as of FQ3'21. The user engagement on the PayPal platform has been consistently going up in the last few years. Users and merchants have been increasingly adopting PayPal's new initiatives like BNPL, Crypto, and QR code. For example, 9.5 million users and 950K merchants have adopted BNPL.
Average amount per transaction: The average amount on the PayPal platform reached $63.2 (annualized) for the quarter, the growth of which is generally in line with the inflation. Thus, making PayPal, or fintech companies broadly, a good hedge for inflation.
Take-rate: PayPal's take-rate has dropped from 2.58% in 2018 to 1.99% in the third quarter because of the success of Venmo P2P and eBay transition (mostly done). PayPal is trying hard to boost its monetization. In August, it raised its merchant fees from 2.9% + $0.30 per transaction to a fixed fee of 3.49% + $0.49 for all U.S.-based transactions. In addition, Papal just announced a deal with Amazon that allows Venmo to be a check-out option, potentially boosting Venmo monetization.
The world will resolve supply chain disruptions eventually. As merchants restock to meet customer demand, PayPal's payment volume will rise as well. In the longer term, PayPal will invest heavily to become an integrated eCommerce player to fend off emerging competitors such as Shop Pay. The operating margin will be a critical metric to monitor while having been relatively stable.
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