The Ratings Game: ‘Pay with Venmo’ optimism sends PayPal to record high

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A previous version of this report misspelled the name of Venmo Chief Operating Officer Mike Vaughan.

Bloomberg

PayPal is hoping to turn Venmo into a moneymaker.

PayPal Holdings Inc. shares on Thursday hit an all-time intraday high and closed at a record after an analyst voiced hope for Venmo’s expansion from a peer-to-peer payments service to include potentially millions of merchants.

PayPal PYPL, +2.83%  shares led tech gainers on the S&P 500 index SPX, +0.56%  Thursday, closing up 2.8% at $65.56, after reaching an all-time intraday high of $65.63, while the Technology Select Sector SPDR Fund XLK, +0.96%  advanced 1% and the S&P rose 0.6%. Previously, PayPal’s highest close was $65.08 on Sept. 22. For the year, PayPal shares are up nearly 67%, while the S&P 500 is up 14%.

After Venmo Chief Operating Officer Mike Vaughan mentioned a plan in September to broaden the service to merchants, Guggenheim Securities analyst Jeffrey Cantwell ran a consumer survey and found that while 9% of the U.S. population uses Venmo, 64% of respondents said they’d use Venmo as their preferred option to make a purchase from a merchant.

Cantwell noted:

Pay with Venmo is the first significant step in Venmo’s expansion from being a P2P platform to becoming a consumer-merchant platform. A large increase in fee-paying merchants presents a natural monetizing opportunity for Venmo. We expect Venmo will be a powerful revenue engine for PayPal.

Cantwell said that merchants would have a strong incentive to use Venmo given the platform’s social aspect, calling to mind examples like Facebook Inc.  FB, +1.67% Instagram and Twitter Inc. TWTR, +2.82% , social media sites that became platforms for merchants to broaden sales.

Read: More social media apps have become payment apps—even Skype

The Guggenheim analyst, who has a “Buy” rating on PayPal, raised his price target to $72 from $67, and expects “Pay with Venmo” would add $73 million to PayPal’s revenue in 2018 and 3 cents a share to earnings. In the past full year of results, PayPal reported earnings of $1.50 a share on revenue of $10.84 billion.

Cantwell cautioned that a rollout of such a service would be a “five-year move, not a five-month move,” however, and that not only authorized merchants but Venmo users would have to opt-in to the service. He noted:

We think one of Pay with Venmo’s potential issues early on is that it is the second step in the process after users click on the Pay with PayPal button — this could create confusion and slow initial uptake. Therefore, while the survey results suggest high demand by consumers for a merchant-facing Pay with Venmo feature, we see areas that will need to be streamlined/improved in order to drive significant adoption.

Of the 47 analysts who cover PayPal, 32 have “Overweight” or “Buy” ratings and 15 have “Hold” ratings on the stock, according to FactSet. The average price target on the stock is $65.84. Since the beginning of September, 13 other analysts have raised their price targets on PayPal.