Paypal to Stripe: You’re Going to Have to Do Better Than That

**Tyler Crowe** (0:01)
The price for PayPal's buyout just went up today on Motley Fool Hidden Gems Investing.
Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by long-time Fool contributors, Lou Whiteman and Matt Frankel. We are deep into earnings season so far. We had several companies posting today, but of course, we can't get to all of them. We're going to cover Boeing's earnings, and we're also going to hit the mailbag. But to start, Lou, you said on our last Thursday show that PayPal was one of the earnings calls you thought was actually worth watching. Well, we have it now. Shares of PayPal are up about 4%, maybe a little bit more as we're taping this right now. So I'm guessing that you liked what you saw as much as the rest of the market did.

**Matt Frankel** (0:48)
Right.

**Lou Whiteman** (0:49)
I mean, of course, there's a lot more than just an earnings call here, but we can get into that. But yeah, the quarter was fine. My takeaway is that this is a healthy, stable company that I have no desire to invest in, to be honest. Revenue is up 5%, earnings per share down slightly, but beat estimates. Total payment volume was up 10%, but look, some of that is holding serve in an ever growing market. I don't know if even like double digit growth there really impresses me. PayPal is a single digit growth story with great free cash flow. They continue to buy back their shares. The share count is down about 10% year over year.
It can continue to do that, or it can go private and use that cash to pay down the leverage. Each is fine, but going into this, we were interested because looking at the potential buyout here.
Look, nothing else. There's nothing in this report to suggest they should scramble and take a bargain price just to get out of the game.

**Matt Frankel** (1:40)
Yeah. As Lou said, the numbers, especially the headlines, they were fine. The fact that Venmo is responsible for the lion's share of the growth, it's worth noting 14% of that payment volume growth year over year was from Venmo.
Buying out pay later volume was up 26% year over year. So it's nice to see that part of the business start to get real traction. It's still a very profitable company. $1.83 billion of free cash flow in the quarter. As Lou said, they're buying back stock hand over fist. They're spending roughly $6 billion annually on buybacks and still have leftover cash flow to invest in their own growth.
One interesting point from the presentation they revealed was that they actually mapped out their three-year growth plan for this year all the way through 2028 based on when investors should expect to see some of their growth initiatives and cost reduction plans actually show up in the numbers. I found that really interesting too.

**Tyler Crowe** (2:40)
Matt, I want to back up for a second. We're talking about buy now, pay later volumes, Venmo being a lot of the total payment volume gains here. Looking at this business, does it really matter that much which of these business grows the most? If you're looking at PayPal on the whole, is there one part of the business where you're like, if this one succeeds, it's going to do a lot better than some of its other parts? I don't know, either it's high margin, whatever trait it is. Is there any particular part of PayPal where you're like, if this is doing well, it bodes well for the company as a whole?
Yeah.

**Matt Frankel** (3:20)
Think of any business where there's two sides, one of which is still in the earlier stages of monetization or realizing its growth potential. I don't want to compare it to an AWS and Amazon's e-commerce platform. But one side of that business is growing faster than the other, and that's the real story, even though it's the smaller and less mature part of the business.
I would put Venmo in that category in the sense that they're still just figuring out how to properly monetize it. I mean, a lot of Venmo transactions are free. They haven't really figured out how to monetize the platform to the extent they've monetized the PayPal consumer checkout program. So there is a lot of monetization to unlock in the platform. And Buy Now, Pay Later is another good example as you just brought up. That's something that is upfront fee income that they get. They generally sell the loans to third parties.
It's a really good way to add extra monetization on top of a legacy, as Lou said, a single-digit growth platform. And the idea is that as Venmo, which has almost as many users as PayPal itself, can get their monetization to that level. If that's growing at a high rate, then it becomes more of a part of the total and the overall top line growth rate could accelerate.