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What to Watch When PayPal Reports Earnings Wednesday

Danny Vena, The Motley Fool

Those who have invested in PayPal (NASDAQ: PYPL) since its split from eBay (NASDAQ: EBAY) have a lot to be happy about. Since that fateful day, PayPal shares have gained more than 100%, double the gain enjoyed by eBay and four times that of the broader market as represented by the S&P 500 (SNPINDEX: ^GSPC)

But while PayPal's fourth-quarter report was stellar, its stock price took a hit when eBay announced that it would begin processing its own payments via privately held Adyen. This news sent PayPal's stock down as much as 15% in the week after eBay's revelation.

Following this shake-up, here are a few things for PayPal investors to watch when the company reports its first-quarter 2018 results this week.

PayPal logo on a see-through partition at the company's headquarters.

Will PayPal's growth continue in the wake of eBay's announcement? Image source: PayPal.

Continued solid growth

PayPal's fourth-quarter financial results included revenue of $3.74 billion, up 26% year over year, exceeding both the high end of the company's forecast and analysts' expectations. Net income for the quarter grew to $620 million, up 59% over the prior-year quarter, producing adjusted earnings per share of $0.55, also beating analysts' consensus estimates.

For the first quarter, PayPal's management said the company expects revenue between $3.58 billion and $3.63 billion, an increase of between 20% and 22% over the prior-year quarter. This would result in GAAP diluted earnings  between $0.41 and $0.43 per share, and adjusted earnings per diluted share of $0.52 to $0.54. 

Analysts are also expecting solid growth. Consensus estimates are for adjusted EPS of $0.54 on revenue of $3.59 billion, with earnings near the high end of PayPal's guidance. It's important to note that PayPal has a history of exceeding its own forecasts, having done so in each of the last four quarters.

Venmo

One area to watch will be the continued growth of PayPal's peer-to-peer payment system Venmo. This payment method has become a hit with younger users for sending money to friends or splitting a check -- though it hadn't made the company any money. Late last year, PayPal announced that Venmo would be rolled out to merchants, and that it could be used as a payment option nearly anywhere that PayPal was accepted. This means PayPal will earn standard merchant fees when Venmo is used. The company hopes that the popularity of Venmo among millennials will help its bottom line -- if it does it'll become a major catalyst for the company in the coming years.

eBay's move wasn't a surprise

PayPal's payment volume has been increasing rapidly, and payments generated by eBay have been a declining part of PayPal's business. According to PayPal, eBay's contribution to its revenue has been growing by only 4%, on average, over the previous 10 quarters; the rest of PayPal's revenue has increased by 23%, on average, over the same time.

For the fourth quarter, eBay represented just 13% of PayPal's payment volume -- down from 16% in the prior-year quarter, and 22% from when the companies split. The drop should continue until the ongoing agreement between the two expires in July 2020.

Paypal seems to be set up just fine to thrive without eBay, but the Market will have a better feel for things after the company reports earnings this week. 

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Danny Vena owns shares of PayPal Holdings and has the following options: long January 2019 $18 calls on eBay and short October 2018 $37 calls on eBay. The Motley Fool owns shares of and recommends eBay and PayPal Holdings. The Motley Fool has a disclosure policy.