PayPal Holdings (NASDAQ: PYPL) is well on its way to becoming a major player in payment processing and finance. The digital-wallet provider’s cash and revenues are growing at an explosive rate.
Revenues at PayPal increased by $407 million; during the first quarter of 2016. The company started 2016 with $9.248 billion in revenues that grew to $9.655 billion by March 2015. This growth is not new during 2015; the year it gained its independence from eBay Inc. (NASDAQ: EBAY), PayPal added $1.223 billion in revenues. It had $8.025 billion in December 2014 and $9.248 billion in December 2015.
What’s more impressive; from a value investors’ standpoint, is that PayPal has added a lot of cash and income to its books over the past year. One of the most impressive numbers is net income; which increased by $919 million between December 2014 and March 2016. PayPal reported $419 million in income in December 2014, and $1.338 billion in net income in March 2016.
PayPal has a Lot of Cash
PayPal is also generating a lot of cash from all the transaction fees and loan interest, that it is running through its ecosystem. The free cash flow increased by $255 million between March 2015 and March 2016; rising from $350 million to $605 million.
The amount of cash the company generated from operations increased by $401 million between March 2015 and March 2016. PayPal reported $2.339 billion in cash from operations in March 2015, and $2.74 billion in March 2016.
Financing is also paying off for PayPal in a big way; the amount of cash it made from financing grew by $2.759 billion between March 2015 and March 2016. PayPal reported making $194 million in cash from financing in March 2015 and $2.953 billion during first quarter 2016. The risks PayPal is taking by issuing all those small business loans seem to be paying off.
PayPal has a Lot of Float
To top it all off, PayPal is a company with a lot of float – it reported $14.57 billion in cash and short-term investments for the first quarter of 2016. That was a $12.1985 billion increase over March 2015 when the company had just $2.375 billion in the bank.
The cash and short-term investments number provides proof that PayPal’s 14.35% profit margin is for real. That profit margin; and the huge amount of cash and float, PayPal is generating shows us why companies as diverse as Apple Inc. (NASDAQ: AAPL), Alphabet (NASDAQ: GOOG), JPMorgan Chase (NYSE: JPM), Amazon (NASDAQ: AMZN), Samsung (OTC: SSNLF) and Walmart Stores Inc. (NYSE: WMT) are experimenting with digital wallets.
The business is highly profitable and it is growing like a weed. PayPal added five million new customers in just three months, data from Statista indicates. There were 179 million active PayPal users at the end of fourth quarter 2015 and 184 million by March 2016.
Ant Financial’s Success shows PayPal’s Bright Future
Those numbers alone indicate that PayPal is still the leader in the digital payment sphere although it has some serious rivals. The greatest of which is Alibaba Holdings’ (NYSE: BABA) spinoff; Ant Financial.
Ant Financial; the privately-held company behind Ali Pay, has been valuated at $60 billion, according to The South China Morning Post. If that number is for real, it would make Ant the fifth largest bank in the People’s Republic of China. Ant was able to use that valuation to raise $4.5 billion from investment banks.
Like PayPal, Ant has been profiting heavily from micro-lending its’ two lending solutions; MyBank and Ant Micro Loan, had 20 million customers had the end of March, The South China Morning Post reported. Ant also has a lot of users; around 450 million or nearly four times as many as PayPal.
This is good news for PayPal because the American-based company has the potential to tap far greater markets. Unlike Alibaba, PayPal is not based in China, and tainted by a connection with the Communist Party.
Bitcoin could be an Opportunity for PayPal
More importantly; PayPal is growing at a faster rate and it has access to greater markets including the United States. One potential huge revenue source available to PayPal, that Ant might not be able to take advantage is bitcoin. PayPal processes bitcoin through its Braintree subsidiary; which has an alliance with Coinbase.
Bitcoin use has been growing fast: Statista reported that there were 15.38 million bitcoins (worth $7.148 billion) in circulation at the end of first quarter 2016. There were just 2.41 million (worth $1.12 billion) bitcoins in circulation during the first quarter of 2010 – just six years ago.
Just three years ago in first quarter 2013 there were only 11.35 million bitcoins (worth $5.275 billion) in circulation. Two years ago in first quarter 2014 there were 12.59 million bitcoins (worth $5.851 billion) in circulation.
Venmo is growing like a Weed
There are some even greater opportunities for PayPal out there including integration with other digital wallets like Apple Pay and Android Pay. There’s also PayPal’s own social media digital wallet solution; Venmo.
The volume of payments processed by Venmo increased by 154% between first quarter 2015 and first quarter 2016, RE/CODE reported. Venmo processed $1.26 billion worth of payments in first quarter 2015 and $3.2 billion in first quarter 2016. That’s an increase of $1.64 billion in just a year, and PayPal has not even enabled the use of Venmo for retail transactions yet.
There is a service called Pay with Venmo which lets users pay in apps. That will enable the use of Venmo to pay at some stores like Target and at gas stations such as ExxonMobil; where you can use apps to pay at the pump. Around 550,000 Venmo users are eligible for Pay with Venmo now, and the services will be available to all Venmo users by the ned of the year.
Theoretically users should also be able to use it to pay at stores that take the payment app Current C. A number of big retailers including Walmart and Target; are beta testing Current C in Columbus, Ohio, right now. Those retailers do not take Apple Pay; which could give PayPal and Venmo an edge in the payment wars.
All this means that PayPal is a really great company that has a really bright future. It is on the cutting edge of payment solutions and it is paying off for investors with a 10.8% return on equity. If you want to buy one financial stock, buy PayPal; you will not be disappointed.
Disclosure: your friendly neighborhood blogger owns a small stake in PayPal and has sold PayPal stock in the past few months.