Buy PayPal Holdings (NSDQ: PYPL)

Target: $110

Buy Up To: $85

Options Trade:

I am holding off on an options trade for PayPal right now. The company reports earnings this Thursday after the close. This near-term event plus the volatility of the market has inflated the options prices so much, it is hard to make this bet.

For subscribers with very high-risk tolerance, you could consider some near-term calls.

Rationale:

PayPal has amassed a huge user and merchant base for its automatic pay feature. Users link their accounts to either a bank account or a credit card account. The merchant pays a fee to PayPal for each transaction processed. Purchase conversion rates using PayPal are significantly higher than payment via credit card.

This payments business is growing in the high 20 percent range and is extremely profitable. PayPal is expanding internationally and its recent purchase of iZettle gives it more exposure in Latin America and Europe.

However, it is PayPal’s Venmo service that excites me. This peer to peer payment system is growing like wildfire. Transaction volume paid via Venmo accounted for about 10% of PayPal’s total volume and grew 76% in the first half of this year.

Here’s the kicker- PayPal has not to date charged any fees for using Venmo. In an effort to establish itself as the premier peer-to-peer payment company, it has waived any fees. It has an enthusiastic, young user base who uses the app to pay for anything from $5.00 for a shared pizza to $100 for groceries.

Venmo users link the system to their bank account and can “sweep” their Venmo account 1-3 days after receiving a payment. Just this year, PayPal initiated an instant pay feature which allows users to have immediate access to funds. The small $.25 per transaction fee is pretty inconsequential to most users and has the potential to generate a large new stream of income.

I expect management to update investors on its progress of “monetizing” Venmo on its quarterly call this Thursday.