Venmo’s Amazon deal may help fuel PayPal’s operating leverage: Canaccord (NASDAQ:PYPL)

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Canaccord Genuity analyst Joseph Vafi believes that the launch of PayPal Holdings’ (NASDAQ: PYPL) Venmo on Amazon (AMZN), expected in the fourth quarter, could fuel further growth of 0.3% to 2.7% for revenue and 0.9% to 6.7% for EPS at full throttle, on an annualized basis.

“Given the somewhat muted EPS consensus estimates for next year, we also believe that such a forward EPS consensus boost could be significant in accelerating PYPL’s bottom line, while simultaneously underscoring the leverage of fixed costs in the overall business model,” Vafi wrote in a note to clients. The analyst reiterates his buy rating on the stock.

The move to Amazon (AMZN) is important in boosting monetization of Venmo, as the giant e-commerce platform has nearly 40% of the e-commerce market share, he said. Additionally, most of Venmo’s current transactions are peer-to-peer (P2P), a very low-margin activity. Vafi thinks it’s safe to assume the deal with Amazon has a take rate range of 1.4% to 2.2% and penetration of 2% to 10%.

Additionally, the deal could spur other e-commerce retailers to sign up with PayPal (PYPL) Venmo. “With approximately 55 million monthly active users in the US on Venmo, we believe this launch could force other e-commerce platforms to compete with Amazon (AMZN) for these customers, leading to a potential acceleration in momentum. merchant acceptance of Venmo over time,” the analyst said. .

Earlier this month, the president and CEO of PayPal (PYPL) said the company was working closely with Amazon (AMZN) to overcome the latest technical issues.

In 2013, PayPal, then part of eBay (EBAY), acquired the Venmo P2P mobile app when it purchased Braintree. Earlier this month, Susquehanna downgraded PayPal (PYPL) to Neutral due to its Braintree unit’s increased share of PayPal’s total payment volume.