To The Moon

$PayPal(PYPL)$

PayPal's stock has been a disaster, dropping over 11.5% year-to-date. While the quarter itself showed solid performance with beats across the board, the issue lay in the guidance, which was weak overall despite some areas of strength. The earnings call also lacked any particularly exciting updates. It has faced significant struggles, with many investors losing confidence. However, I’ve consistently argued that PayPal is not a dying company but rather a business presenting solid opportunities. The stock previously surged 40-50%, only to fall about 15% from near all-time highs. Now, as retail investors begin to give up on it, I want to revisit the topic, share my insights, and assess whether this dip presents a compelling opportunity. Was the recent earnings reaction an overreaction, or was it justified?

Earnings Performance

PayPal’s earnings per share (EPS) beat expectations at $1.19 versus $1.12. Revenue also surpassed estimates, and the company announced a massive $15 billion share buyback program, planning to execute $6 billion of it in 2025. This is a significant move for PayPal.

Additionally, total payment volume (TPV) increased by 7% year-over-year. I've always maintained that if PayPal were truly a dying company, its payment volume would be declining. Instead, TPV has been steadily growing, albeit at a slower pace—from 10-12% growth previously to 7% now. Venmo remains strong, growing at 8% year-over-year, slightly lower than the 9% growth rate in 2023, but still making up a substantial portion of revenue.

Concerns in the Report

That said, this wasn't a perfect earnings report. There were several concerning factors that could justify a lower valuation.

Decline in Payment Transactions

The number of payment transactions has been on a downward trend: from 13% growth to 11%, then to 8%, 6%, and now a 3% decline. This significant shift in trend has alarmed the market.Some investors I’ve spoken with suggest that PayPal is focusing on higher-margin transactions and businesses, which might explain the decline. However, this reasoning may have been misunderstood by the market, leading to a negative reaction.

Slowing Revenue Growth

Revenue growth has decelerated from 9% to 8%, then to 5%, and now to 4%. This trend is concerning—if it continues, it could signal deeper structural issues for the company.

Key Challenges: Braintree & PSP Unbranded

One area of concern was Braintree, which only grew 2% YoY—down from 11-13% in prior quarters. However, this was expected. PayPal previously stated that revenue growth would slow due to ongoing merchant negotiations and a focus on prioritizing profitability over volume. This strategy is expected to impact revenue growth through 2025 before reaccelerating from a new baseline.

Share Buyback and Market Implications

One pattern I’ve noticed across multiple companies is that large share buyback programs often signal that management expects potential headwinds. While this isn't always the case, many companies announce buybacks when they anticipate weak earnings. PayPal’s $15 billion program could be a strategic move to support the stock in case of further declines.

Analysts forecast revenue growth of around 4% this year, followed by a rebound to 6-7% in the coming years, which aligns with PayPal’s long-term trajectory.

Is PayPal Dead Money?

PayPal isn’t a company driven by groundbreaking innovation or rapid revenue expansion, and I acknowledge that. However, that doesn’t mean it’s a bad investment. Not all successful stocks need double-digit revenue growth.

There’s a concept in investing known as “cannibals,” coined by Charlie Munger, referring to companies that aggressively buy back their stock. A great example is AutoZone—it’s not a high-growth or highly innovative company, yet its relentless buybacks have driven tremendous stock price appreciation over time. The same has happened with companies like NVR.

Could PayPal follow a similar path? While it may not be the most exciting stock in the market, its buyback strategy could drive significant long-term value.

While PayPal's stock has been declining, there are many companies with unexciting business models that still deliver strong, predictable revenues. These companies often grow at low to mid-single-digit rates but use their free cash flow to aggressively buy back stock. Over time, this approach can yield surprisingly strong results.

PayPal has been consistently repurchasing shares, even as its stock has fallen significantly. If this trend continues over the next two to three years, I’m not saying PayPal will become the next AutoZone, but it does seem to be following a similar trajectory.

Guidance

Looking at the company's latest guidance, PayPal expects revenue growth of around 4-5% in the near term. However, its free cash flow forecast stands at $6-7 billion.

To analyze this more accurately, I want to address stock-based compensation (SBC), which often distorts free cash flow calculations. Many believe that PayPal already accounts for SBC in its financials, but that’s not entirely correct. While SBC is adjusted out of earnings per share (EPS), it is still added back into the cash flow statement.

Free Cash Flow

For instance, in PayPal’s latest quarter, the company reported $2.1 billion in free cash flow but also had $283 million in stock-based compensation. Over the full year 2024, stock-based compensation totaled approximately $1.2 billion. Adjusting for this, PayPal’s actual free cash flow is closer to $5.8 billion.

With PayPal’s market cap at roughly $75 billion, this results in a 7.5% free cash flow yield—a solid number for a company that is still growing, albeit at a slower pace of 4-5%. By 2025, I expect PayPal to return to its long-term revenue growth trend of around 6.5-7%.

Valuation

If we assume:

• A 7-7.5% free cash flow yield

• Revenue growth of 6.5-7% annually

• Stable margins with no multiple expansion or contraction

This would suggest an annual return of approximately 13-14%.

That’s a solid return for a stable company with strong cash flow and an aggressive share buyback program. PayPal has plenty of cash, generates significant free cash flow ($5.8 billion annually), and is consistently returning capital to shareholders.

At $90 per share, the stock was somewhat expensive, making the recent selloff understandable. However, at current levels, it looks far more reasonable in terms of free cash flow yield and price-to-earnings (P/E) ratio, which is now becoming attractive.

I still believe in PayPal’s long-term potential. A full recovery is possible, though it may take time. While I don’t expect the stock to hit $300 in the next year, I do think it could get there before 2030, representing more than a 3x return from current levels. Plus, with an additional $15 billion in share buybacks—on top of the existing $4 billion—the company could retire close to 20% of its outstanding shares, which is significant.

Conclusion

I still like PayPal at these levels and consider it a buy. In the past, I’ve sold put options on the stock and may do so again, as I continue to see value here. While the selloff was partly justified, the current price presents a much better opportunity for long-term investors.

While PayPal’s stock is struggling, the underlying business is showing signs of improvement. The upcoming Investor Day will provide further insights, and I think that’s when investors should make more informed decisions—not based on the immediate stock reaction. The long-term trajectory still looks promising, but patience is required.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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