PayPal’s Growth Slows in Third Quarter

PayPal's PYPL growth in the third quarter remained fairly strong on an absolute basis, though it was slower compared with recent results. This is largely due to the expected wind-down of its eBay relationship and the fact that PayPal is running up against difficult comparisons. We think the quarter showed that PayPal's trajectory going forward might not be completely smooth and that the current market price reflects more of a best-case scenario from a long-term perspective. We will maintain our $147 per share fair value estimate for the narrow-moat firm. Total payment volume increased 24% year over year on a constant-currency basis, driving revenue growth of 13% during the third quarter. EBay marketplaces fell to 3% of volume (from 7% last year) and total payment volume was 31% when excluding this drag. Year-over-year growth in transactions per active account remained strong at 10% but slowed slightly sequentially. Net new active accounts for the quarter were 13.3 million, a pickup from the last quarter. We remain impressed by PayPal's ability to keep the increase in active accounts well above prepandemic levels. We believe the firm continues to be well-positioned relative to current payment trends but remain concerned that its areas of focus may grow more competitive. Venmo payment volumes increased 36% year over year, a noticeable reduction from recent rates as the company starts to lap stronger comparisons and works off a larger base. PayPal has partnered with Amazon to allow consumers to use Venmo on Amazon's site starting in 2022, which could provide another leg of growth. On a somewhat related note, the company provided some details on its buy-now-pay-later offerings, noting that it has reached $8 billion in annualized payment volume. This is a drop in the bucket compared with overall volumes, but it's a positive sign that PayPal can use its position to adapt to and exploit changes in consumer payment preferences.

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