Paypal has one big hurdle to clear with Venmo (PYPL)

Investors are waiting for PayPal's plan to monetize Venmo.
RBC sees 29% growth in Total Payment Volume but also sees a decrease in the take rate due to Venmo.
If the company can monetize Venmo, RBC predicts an additional $0.09 of earnings per share in fiscal year 2018.

Paypal, the digital-payments giant, is getting ready to report its quarterly results following Wednesday's closing bell and investors will be honing on one key thing: how the company plans to monetize the mobile-payment service Venmo.

The potential for Venmo is there, but the company has brought in little revenue from transactions on the platform.

RBC analyst Daniel Perlin anticipates 29% year-over-year growth in Total Payment Volume (TPV), but he also expects the take rate to fall by about 17 basis points. The take rate refers to the cut of a transaction that the company gets to keep as revenue, which means a higher take rate will result in more revenue per transaction.

While the growing adoption of Venmo boosts the number of transactions taking place, it presents a problem for PayPal as the company makes little money off peer-to-peer transactions. With peer-to-peer payments, Venmo takes a 3% cut if a credit card is used, but charges nothing if one pays a friend by connecting a bank account or an existing Venmo balance.

Monetization of Venmo presents a large opportunity for revenue growth, especially as Perlin expects another solid quarter of volume growth.

"We expect Venmo to report another solid quarter of volume growth (86% y/y last quarter) and believe investors will look for an update on the potential monetization of this volume, including Pay with Venmo, which was rolled out for all US merchants during Q4/17," Perlin wrote in a note sent to clients on Tuesday.

"We estimate that Venmo monetization could represent a potential $0.09 to EPS in FY18 (some amount possibly already contemplated in guidance) and $0.15 in FY19."

Though competition is increasing, Perlin reiterated his outperform rating and remains impressed by Paypal's strong account growth driven mainly by Paypal and Venmo. At the end of the fourth quarter, the company had 227 million active customer accounts and 18 million active merchant accounts, he writes. He also noted new active accounts jumped 61% versus a year ago during that quarter.

Wall Street is expecting PayPal to report adjusted earnings of $0.54 a share on revenue of $3.59 billion, according to analysts surveyed by Bloomberg.

PayPal shares are up 2.35% this year.