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The Future of PayPal: Interpreting 4Q16

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A ray of hope

Although PayPal (PYPL) faces competition from almost all angles, its peer-to-peer payment service, Venmo, has become a source of great hope. The service registered a strong performance in 4Q16, with payment volumes rising 126% to $5.6 billion. Venmo is widely popular with millennials, a key customer segment.

The company also said its active subscriber accounts rose 10% to 197 million, topping the consensus estimate of 196.5 million.

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Rising revenue, downbeat outlook

PayPal reported 4Q16 results that were in line with the consensus estimates. Its revenue of $2.98 billion was spot-on, rising 17% YoY (year-over-year), while its adjusted EPS of $0.42 was also exactly what Wall Street expected.

Although PayPal met expectations in 4Q16, the company issued a subdued outlook for the current quarter. It is expecting revenues to be in the band of $2.9 billion–$2.95 billion, yet its consensus estimate calls for revenue of at least $2.95 billion. This guidance puts PayPal in a tight spot because a miss would generally spark a selloff in the stock.

Growing competitive pressure

PayPal’s downbeat outlook appears to underline the growing competitive pressure that the company is facing in the digital payments market. Apple (AAPL), Alphabet (GOOGL), and Alibaba (BABA) affiliate Ant Financial have stepped up competition for the control of mobile payments market.

Meanwhile, PayPal has entered into strategic alliances, acquired key assets and launched new features in a bid to fend off the growing competition. The company’s partners include Citigroup (C) and Discover Financial Services (DFS). Its acquisitions include Venmo, Braintree, and Xoom.

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