Top Picks 2018: PayPal (PYPL)

01/12/2018 5:00 am EST

Focus: FINANCIALS

Linda McDonough

Hedge Fund Analyst, Profit Catalyst Alert and Growth Stock Strategist

PayPal (PYPL) is morphing into a digital and mobile payments gatekeeper. Its software lets consumers fund accounts via credit, debit or bank accounts, notes growth stock specialist Linda McDonough, editor of Profit Catalyst Alert.

PayPal is winning over young customers with its Venmo service. The payment company’s Venmo is a peer-to-peer payment program. Millennials love Venmo. Using physical cash puzzles this generation which prefers to pay via their mobile phones.

PayPal’s Venmo service is an app that sits on your phone. It links to your bank account, credit or debit card. To date, it is used mostly to pay another person. Opening Venmo up to retail payments next year will rev up PayPal’s profits.

Venmo has become so ubiquitous among younger consumers that it is now a verb. Split a pizza? Venmo your roommate $6.00. Just like texting evolved from a teen-only means of swapping gossip to an all-ages method of communication, the mass market is adopting Venmo.

I first became acquainted with Venmo when I owed one of my children some money. I had several ways to pay him. I chose Venmo. PayPal makes using Venmo easy. Download the app. Connect Venmo to your payment choice. Search for the recipient’s profile. With the touch of a button, funds transfer from one account to the other.

The money sits in the recipient’s account until it is used to pay others via Venmo or the amount transfers into your payment choice. PayPal got the Venmo technology when it bought Braintree Payment Systems in 2013. It saw the magic in Braintree’s peer-to-peer payment system. It spent four years building a mass market.

Industry experts estimate that Venmo has 10 million users. None of those users currently pay transaction fees. All the while, PayPal’s basic business blossomed. After PayPal added debit and credit cards to payment choices, user growth rocketed. PayPal’s total active account base grew 14% last quarter.

With over 200 million active accounts and close to 10 million Venmo users, the company has the scale to enjoy the network effect. PayPal also offers immediate access to Venmo funds for a $0.25 fee. This seems like a small amount to pay for the convenience. I expect this fee will generate significant revenue for the company.

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