PayPal's Venmo is morphing into a 'super app': BofA

PayPal's (PYPL) Venmo is set to become an even more formidable player in the payments space in the next several years, according to Bank of America.

In the past year, PayPal has evolved beyond its early peer-to-peer payments capabilities, rolling out new features including a Venmo credit card and cryptocurrency trading. The company has also eyed introducing high-yield savings accounts and budgeting tools. And on Monday, CNBC reported that PayPal is looking to roll out a stock-trading app.

"Venmo has significantly evolved from once being a predominantly P2P platform to where it is today as a digital wallet with multiple monetization levers, as the platform continues to morph into a 'super app,'" Jason Kupferberg, Bank of America research analyst, wrote in a note on Monday, adding that the new features will help boost growth for the lucrative wallet app.

A PayPal spokesperson confirmed the latest report to Yahoo Finance, noting CEO Dan Schulman discussed intentions to launch a stock-investing platform at the company's investor day in February. As part of PayPal's plan to become a stock trading app that will allow users to buy, sell and hold individual stocks, the company brought on former Ally Invest president Rich Hagen, CNBC first reported.

"We expect these features will drive continued strong growth in Venmo users, and accelerate growth in average revenue per user (ARPU) over the coming years," said Kupferberg, who rates the stock as a Buy with a price target of $323, implying further upside of 12% from Monday's closing prices.

For now, Venmo's revenue streams have come from fees from its credit and debit cards, merchant payments and cryptocurrency transactions on the platform, and instant transfers, or when users pay to immediately send Venmo balances to their banks. Additional functions through the app would offer even further monetization opportunities, Kupferberg added.

"The punchline is that in our base case, we estimate total active Venmo users could reach 120M in 2023 (up from 76M as of 2Q) and that ARPU for Venmo could reach $19.92, reflecting a ~30% CAGR (compound annual growth rate) from 2020-2023," he said. "That would imply total Venmo revenues of $2.4B in 2023 (6% of total revs), versus the expected ~$900M in 2021 (~3.5% of total revs)."

This would build on growth both PayPal and Venmo have seen over the course of the past year-and-a-half, with stay-in-place behaviors during the COVID-19 pandemic helping to fuel digital payments growth.

Venmo processed about $58 billion in total payment volume in the second quarter this year, with this sum growing 58%, compared to the same period last year and comprising about nearly one-fifth of PayPal's total payment volume during the quarter. And Venmo's payments volume growth rate also accelerated from the second quarter of 2020, when total payment volume increased 52%.

PayPal has also been in competition with rival payments company Square (SQ), which offers its own flagship peer-to-peer payments and wallet platform Cash App. Like Venmo, Cash App has grown considerably in the past year, with monthly transacting active customers increasing by more than 30% to 40 million in June this year.

"PYPL has said Venmo is expected to generate positive operating income starting in 2022, but we believe the volume and revenue momentum of the platform is more important for the stock," Kupferberg said. "Notably, our analysis does not consider expansion of Venmo into new countries outside of the U.S. (PYPL intends to expand Venmo into international markets within the next five years), which offers upside potential to our estimates."

Shares of PayPal have risen 23.2% in 2021 to-date, outperforming against the S&P 500's 20.6% rise over that period.

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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck