Despite all the hype about Apple Pay, PayPal (NASDAQ: PYPL) is looking more like the winner of the payment wars each day. The digital wallet is growing like crazy and making lots of money; even as Apple Inc. (NADAQ: AAPL) struggles to get merchants to accept its solution.
The number of PayPal users has been growing steadily for six straight years. Statista data indicates that PayPal has added users for every quarter since, first quarter 2010. Over that time PayPal’s usage has grown from 84.3 million accounts to 192 million accounts.
PayPal has added 107.7 million accounts in the last six and a half years. That means it is capable of sustained growth. Those numbers represent actual users that have gone out of their way to open an account.
The number of transactions PayPal processed grew by 24% between third quarter 2015 and the same period in 2016. PayPal processed 1.2 billion transactions in third quarter 2015 and 1.5 billion transactions a year later. That means PayPal processed an additional 300 million transactions.
These numbers give PayPal lots of float because it charges a small fee on each transaction. That float is what makes PayPal a value investment.
In contrast it is almost impossible to find hard data about Apple Pay, nobody seems to be tracking the number of users that solution has. Instead Apple likes to brag about the number of banks and merchants that support and accept, but fails to tell us if anybody’s actually using the app.
PayPal has also been doing quite well in total payment volume; or TPV, reporting $87 billion in TPV for third quarter 2016, Tech Crunch reported. That was below projected numbers but I like all that cash.
Is PayPal Making Money?
Value investors will say okay, so PayPal is growing but ask: is it making money. The answer to that question is a very definite: “yes!”
PayPal reported a net income of $1.378 billion on September 30, 2016. That marked a $22 million increase over the $1.356 billion the company reported for net income in June 2016. It was also a $231 million increase over the $1.147 billion PayPal reported in September 2015.
That shows us that PayPal is not only making money off all those transactions, the amount of money it makes from those transactions is also growing.
PayPal’s Revenue now Exceeds MasterCard and Discover’s
Nor is income the only thing that’s growing, PayPal’s fast growing revenues now exceed those of MasterCard (NYSE: MA) and Discover Financial (NYSE: DFS). It looks as if PayPal is growing faster and more systematically than established credit card giants.
PayPal reported $10.42 billion in revenues on September 30, 2016. MasterCard reported $10.19 billion in revenues on June 30, 2016. Discover reported $8.833 billion in revenues on June 30, 2016.
Like its’ net income the revenues at PayPal are showing sustained growth. PayPal reported $10.01 billion in revenues in June 2016 and $8.885 billion in revenues in September 2015. PayPal’s revenues grew by $1.535 billion over the past year, and by $410 million during third quarter of 2016.
PayPal has a Lot of Float
If this continues PayPal is well on the way to becoming a payments industry giant but does it have the float to sustain that growth. One reason why I like financial companies as investments is that some of them have a lot of float.
The financial numbers indicate that PayPal falls into that category because it is generating a lot of cash. PayPal reported a free cash flow of $618 million, cash and short term investments of $5.088 billion and assets of $31.36 billion on September 30, 2016. It was also generating a lot of cash from operations; $2.963 billion, and financing: $940 million.
It is all that cash that gives PayPal the resources to keep expanding and growing. At this rate, PayPal might even grow into a cash cow on the order of Alphabet (NASDAQ: GOOG) or Facebook (NASDAQ: FB).
Venmo and Braintree are Growing like Weeds
That will only occur if PayPal is successful in its expansion into mobile payments and brick and mortar retail. The latest numbers reported by PayPal indicate that is happening.
Between Third Quarter 2015 and 2016 the number of cards on file with PayPal’s business payment processor Braintree grew by 107%. That number rose from 185 million in 2015 to 382 million in 2016, making for an increase of 197 million.
Payment volume at PayPal’s social media money-transfer app Venmo increased by 131% during the same period. Venmo processed $2.1 billion in third quarter 2015 and $4.9 billion during the same three months in 2016. That means Venmo’s payment volume increased by $2.8 billion in just 12 months.
Does PayPal pay a Dividend?
Unfortunately PayPal does not pay a dividend yet. That limits its appeal to income investors but makes PYPL a good long-term investment that will make you some money.
PayPal shares rewarded investors with a return on equity of 10.05% on September 30. The share value is also capable of quite a bit of growth, On Monday October 18, 2016, PYPL was trading at $39.83 a share by Friday October 21, 2016; it was trading at $44.15 a share.
That makes PayPal a growth stock that generates a lot of cash. My guess is that it will pay a nice dividend day, but until then it will generate a lot of cash and grow systematically. PayPal is on track to becoming a payment industry giant that might outstrip such historic rivals as American Express (NYSE: AXP) at some point.