PYPL PayPal Holdings Inc

By Telis Demos 

PayPal Holdings users have been buying online like it's Cyber Monday every day.

The digital-payment company grew rapidly in the first quarter despite a big decline in important spending categories like travel and events. The continuing shift from cash and in-store card spending to digital and e-commerce shopping is more than making up for continuing weakness in that kind of spending.

Total payment volume grew 30% from a year earlier in the second quarter in constant currency terms, despite a nearly two-thirds drop in travel and events. That is up from 19% growth in the first quarter. June was the fastest-growing volume month for PayPal since it separated from eBay in 2015. Notably, even cross-border transactions grew 24% in the second quarter from a year earlier: People may not be traveling, but online shoppers are happy to digitally cross borders.

Even if some old habits return, PayPal has now sharply expanded its core user base. It added more net new active users in the quarter than it did in all of 2016. It also added 1.7 million more merchants who accept PayPal in some form, about triple the usual quarter's growth.

The question for investors is, when the world returns to something resembling normal, will PayPal have permanently altered its place in the landscape? That depends in part on some initiatives now under way. PayPal said it has struck a deal with CVS Pharmacy to enable the retailer to add PayPal and Venmo QR codes to store checkouts, allowing users to easily pay with their smartphones. If PayPal can take a meaningful share of in-store shopping, where it hasn't had a big presence historically, that could bolster its position among rivals.

PayPal is also trying to make itself stickier with consumers by adding more services to its wallet. For example, it now enables Venmo users to directly deposit their paychecks into their digital coffers. It is in the process of rolling out bill payments and new ways to manage rewards points.

One headwind is that one of PayPal's most historically lucrative added services, lending, is a drag right now. Other value-added services revenue, which includes lending, shrank 26% from a year ago, hit by fewer merchant loan originations, lower interest rates, customer forbearance actions and larger loan-loss provisions.

Some of those effects will likely prove temporary, but investors buying into a stock that has already risen 70% this year will need to watch PayPal's broader initiatives closely. PayPal's core operating margin expanded by more than 5 percentage points in the quarter from a year earlier. The company said it would invest that in new growth. That takes the added income away from shareholders for now, but doubling down and giving retailers and consumers reasons to permanently change the way they pay and do business is the right move. As Chief Financial Officer John Rainey put it: "We want to help shape the outcome here."

For one thing, putting more marketing spend behind PayPal's QR codes, which aren't as familiar a mechanism to many U.S. shoppers as they are elsewhere in the world, will be vital -- especially since other mobile wallets, like Apple Pay, are likewise charging ahead into this transition. This is no time for PayPal to sit back and count its winnings.

(END) Dow Jones Newswires

July 30, 2020 06:14 ET (10:14 GMT)

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