Venmo's Amazon deal can help fuel PayPal's operating leverage, Canaccord says
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Canaccord Genuity analyst Joseph Vafi estimates that the launch of PayPal Holdings' (NASDAQ:PYPL) Venmo on Amazon (AMZN), expected in Q4, could fuel incremental growth of 0.3%-2.7% for revenue and 0.9%-6.7% for EPS on a full run rate, annualized basis.
"Given somewhat muted EPS consensus estimates for next year, we also believe such a boost to forward EPS consensus could be material to accelerating bottom line performance for PYPL, while simultaneously underscoring the fixed cost leverage in the overall corporate model," Vafi wrote in a note to clients. The analyst reiterates his Buy rating on the stock.
The move onto Amazon (AMZN) is significant in boosting Venmo's monetization, in that the giant ecommerce platform has almost 40% of the ecommerce market share, he said. Furthermore, most of Venmo's current transactions are peer-to-peer (P2P), a very low margin business. Vafi thinks it's safe to assume the agreement with Amazon has a take rate range of 1.4%-2.2% and penetration of 2%-10%. 
Furthermore, the agreement could spur other ecommerce retailers to sign up with PayPal's (PYPL) Venmo. "With approximately 55M monthly active users in the US on Venmo, we believe this launch could compel other ecommerce platforms to compete with Amazon (AMZN) for these customers, driving a potentially accelerating cadence of Venmo acceptance by merchants over time," the analyst said.
Earlier this month, PayPal (PYPL) President and CEO said the company is working very closely with Amazon (AMZN) to overcome the last technical issues.
In 2013, PayPal, then a part of eBay (EBAY), acquired the Venmo P2P mobile app when it bought Braintree. Earlier this month, Susquehanna downgraded PayPal (PYPL) to Neutral due to its Braintree unit's increased share of PayPal's total payment volume.