PayPal Holdings (PYPL -0.12%) might turn out to be one of the year's best turnaround stories. It started the year on a positive note, with a new CEO and trajectory, and so far PayPal stock is up 25% year to date.
Let's see if that's likely to continue and where PayPal might be at this time next year.
Platform: improving
New CEO Alex Chriss has a vision to transform PayPal from what he calls a "series of products and services" into a unified, compete, omnichannel payment platform.
It already has the dominant fintech platform globally, and his mission is to maintain that position and leverage it capture market share and generate growth. Users haven't been captivated by PayPal's interface when there are fresher faces around, and PayPal has needed an overhaul of its systems and marketing to present an upgraded platform and then project it to users.
PayPal has made a slew of deals with partners over the past few weeks, including Shopify to feature it as a checkout option on Shopify stores. It also launched a one-page accelerated checkout option called Fastlane, and it's working with Adyen and Fiserv to roll it out quickly. Management says that Fastlane checkout has 80% conversions vs. the industry average of 50%.
Last Wednesday, PayPal made headlines with the news that it's parterning with the elusive Amazon, which still doesn't feature it on its website. The deal is to add PayPal as a payment choice through Amazon's Buy With Prime service, which it offers to its third-party sellers to use on their direct-sales websites.
I'll add that my personal experience with PayPal has recently been very positive, which gives me more confidence to say that it looks like a buy. As recent as last year I tried to use PayPal for a payment that became too complicated and I gave up. But it's become much simpler and easier to use, and the upgraded platform gets a thumbs up from me.
Revenue: rising
Revenue has been increasing steadily over the past few years despite problems in other areas. It increased 9% year over year (currency neutral) in the second quarter, with total payment volume up 11%.
Transactions increased 8% year over year, and transactions per active account, where PayPal has been focusing its attention, increased 11%. It's working on engaging its active users, and it's showing results.
The Amazon deal is a huge win for PayPal, adding a significant partner to generate higher revenue, and investors should expect to see updates on how it's going. Expect the new partnerships, as well as others that might be upcoming, to add momentum to PayPal's business and meaningfully add to sales.
PayPal should also benefit from lower interest rates. If money begins to flood the economy, that will work in PayPal's favor. E-commerce is still a growing industry, and PayPal is carving out its niche. In a year from now, PayPal's sales should continue to increase at healthy rates sand could be accelerating.
Profits: increasing
Part of PayPal's problem is that much of its growth has been coming from its Braintree business, or what it calls the "unbranded business." That's because Braintree is a white-label checkout system for e-commerce retailers. Since it's like a wholesale business, it comes with lower gross margins, and since that's where the growth has been, it's pulling the total lower as well.
So there have been two things going on here: PayPal's branded business growth looks anemic, while its higher-growth segment has posted sluggish profits. Not a great combination for a company trying to reinvent itself.
But it demonstrated improvement in the second quarter. Chriss has committed to pricing Braintree's services at its true value, meaning raising prices. Management said that transaction margin dollars, a metric it doesn't usually report, increased 8% year over year, and Crhiss noted that Braintree is "meaningfully contributing to transaction margin dollar growth for the first time in over two years."
Expect further updates about this metric and for the gross profits to trickle down to higher earnings.
Stock price: gaining
PayPal stock has been gaining steadily over the year, and it jumped after impressive second-quarter earnings. But it got a huge boost from the news that Amazon will start featuring it on Buy With Prime.
You may have missed some of the price increase, but you should be focused on the long term anyway. PayPal stock may not be quite the dirt-cheap bargain it was last year, but it also comes with less risk. The story looks a lot stronger now, and it's still trading at an utterly reasonable 16 times forward 1-year earnings.
PayPal is in an excellent position right now, and it should be reporting strong results from its new initiatives in a year from now.
