E-Payment leader Paypal Holdings (NASDAQ:PYPL) reported its Q3 2015 earnings on October 28th with mixed results that triggered, in the after hours, a sharp decline in PayPal stock price after rising 1.6% in regular trading hours. As shown in Chart 1 below, PayPal beat analysts’ consensus for EPS and came slightly below on revenues in Q3. However, the main issue that troubled investors with PayPal results was the company’s 2015 full-year guidance, which was flat compared to the previous guidance provided, and reflected 16.5% annual YoY growth.

As I mentioned in an earlier article about PayPal just before the earnings, the market expected PayPal to grow its top-line revenues to more than 20% and lift its full-year guidance to reflect such growth. However, when the company provided full-year guidance, it was in-line with analysts’ consensus. In its previous guidance, PayPal reiterated a lower YoY growth rate than previous years.

Core Transaction Business

PayPal reported a 13% YoY increase in transaction revenues as a result of a 20% YoY growth in the total payment volume (‘TPV’) that hit a record level of $69.7M. The gap between the transaction revenue's growth and TPV growth is best explained by the reduction in transaction margins. The transaction margin represents the percentage of every transaction that PayPal keeps at the end after deducting transaction expenses and transaction losses. The transaction margin fell from 63.5% in Q314 to 62.3% in Q315 and reflects the narrowing profitability from transaction fees, which might indicate a change in trend in the next following quarters.

Emerging revenue streams

On its emerging revenue streams, PayPal announced that in the previous quarter, it passed the $1B milestone of working capital loans since it started the program in 2013. PayPal Working Capital is part of the company’s strategy to provide more financial services to small and medium merchants to create a comprehensive financial platform that competes with other services like Square (SQ), Stripe, etc.

In light of the rise of the new mobile payment services like Apple Pay, Samsung Pay, and Alphabet Inc-C (NASDAQ:GOOG) Android Pay, it was interesting to see how PayPal manages to compete in this market. Apple did not provide specific details about its Apple Pay business in the recent earnings release other than Tim Cook’s comment: “Apple Pay is seeing double-digit growth in transaction month after month, and we continue to add major businesses including Starbucks, which will roll out Apple Pay support to all its U.S. stores in 2016.” Unlike Apple, PayPal provided a little bit more color on its mobile payments business, stating that 345 million transactions, almost 30% of PayPal’s total transactions, were mobile transactions. The mobile transaction business grew by 38% YoY according to CEO Dan Schulman. However, no additional information was given about that business and its contribution to the company’s top-line or bottom-line performance.

Conclusion

I don’t share the same gloom and doom sentiment that drove the PayPal stock down after earnings. I believe that, as in many other cases in Wall Street, expectations from PayPal were simply too high, and the market was not ready to accept results that were matching expectations. PayPal is still leading the digital (and mobile) payment market with significant YoY growth rates. In light of the fact that the digital payments market became very crowded lately with deep-pocket giants like Google, Apple, and Samsung trying to nibble on PayPal’s market share – I see the current guidance as a good sign of its brand strength and successful operation. With the expected acquisition of Xoom, I believe PayPal will substantially increase its global presence. I remain bullish on PayPal.