PayPal Holdings (NASDAQ:PYPL) reports earnings after the market closes on Feb. 3, 2021. Last year, the pandemic created global tailwinds around all things digital. As a result, PayPal stock jumped 117%. But after that big run, Wall Street will be expecting impressive numbers -- here's where investors should focus their attention.

1. Active accounts

Active accounts is one of the most important metrics in assessing PayPal's business. It is both a core driver of revenue and a fundamental part of the company's network effect -- PayPal becomes more valuable for all merchants with every new consumer, and vice versa -- which gives the company an edge over its rivals. 

Smiling woman with smartphone and payment card.

Image source: Getty Images.

In the last year alone, the fintech company has launched several new products to strengthen its payments ecosystem. For instance, in May 2020, PayPal deployed QR code technology in 28 markets, enabling touch-free consumer payments with the the PayPal and Venmo apps. In Oct. 2020, PayPal also launched the Venmo credit card and gave consumers the ability to buy and sell bitcoin directly from their PayPal accounts.

As a result of these strategic moves, among others, active accounts growth has accelerated through the first nine months of fiscal 2020. Investors should look for that trend to continue in the fourth quarter as the company's growth initiatives should help engage consumers and drive adoption.

Metric

Q3 2019

Q3 2020

Active Accounts

295 million

361 million

Change (YOY)

16%

22%

Data source: PayPal press release. YOY = year over year.

2. Total payment volume

PayPal primarily generates revenue by charging merchants (or consumers) a fee based on total payment volume (TPV) and the number of payment transactions. For instance, merchants in the U.S. are charged 2.9% plus $0.30 per online transaction. This fee is split among all parties involved, including banks, credit card networks, and payment processors like PayPal.

Put another way, as the amount of money moving through PayPal's network increases, so does the company's top line. In that sense, TPV allows investors to understand how effectively PayPal is engaging consumers. Not surprisingly, they were very engaged in the first nine months of fiscal 2020. Pandemic-driven business closures and social-distancing efforts kept people at home where they turned to online shopping and digital payments.

Metric

2018

2019

Nine Months Ended
Sept. 30, 2020

Total Payment Volume

$578.4 billion

$711.9 billion

$659.0 billion

Change (YOY)

27%

23%

29%

Data source: PayPal SEC filings. 

For full-year 2020, PayPal's guidance puts total payment volume growth in the "low to mid 30%" range, or $925 billion to $960 billion. This would be a substantial acceleration over the 23% growth reported in 2019 and a very positive sign for the company's future prospects.

3. Operating margin

PayPal's operating profit is what's left over after the company covers its operational costs -- things like transaction expenses (fees charged by banks and other financial institutions), transaction losses (chargebacks and fraud), marketing, technology development, and other administrative costs. That may sound boring, but a company's operating margin is an important indicator of efficiency and profitability.

Companies with strong competitive advantages tend to become more efficient over time. For instance, as PayPal's customer base expands and usage of its platform increases, revenue growth should ideally outpace growth in operating expenses, leading to increased operating margins. In fact, this was the case in both the second and third quarters of 2020.

However, the pandemic has put additional strain on businesses and left many consumers in a tough financial position. This increases the risk for transaction losses. That's why investors should pay attention to this metric.

A final word

Earnings season can be exciting -- everyone loves to see a stock pop after an earnings beat -- but investors should focus on the big picture. If PayPal misses guidance by a few percentage points and the stock sells off, it may be an opportunity to add a few shares, not a reason to sell.