To The Moon

$PayPal(PYPL)$

A while back, around October last year, I wrote an article on paper when the stock was trading at approximately $53. At the time, I mentioned that I would likely buy the stock if I didn’t already own Amex. Now, I no longer hold Amex, and it has performed well.

The Honey Scandal and Stock Decline First, the Honey scandal came to light—where Honey was replacing cookies to claim commissions—and since then, the stock has dropped significantly, now back down to $70. The key question now is: Is the company still showing growth potential, and should we consider buying the stock?

Earning Overview

PayPal is demonstrating a return to profitable growth in transactions, which was a concern for many. The transaction business has always been highly competitive, and while PayPal was never expected to disappear, competition has been squeezing margins and slowing revenue growth. However, they’ve finally returned to growth—though modest at 5%.

PayPal’s Decline from All-Time HighsPayPal’s stock has dropped 77% from its peak. Similar to Nike, I reviewed PayPal’s latest earnings report and highlighted key takeaways. In Q4 2024, PayPal's revenue grew 4% to $8.4 billion, and transaction margin dollars increased by 7%. However, GAAP operating income declined 17%, with the GAAP operating margin shrinking by 4.31% to 17.2%. GAAP earnings per share (EPS) also dropped 15% to $1.11.

Fundamental Analysis

As for PayPal’s focus, they aim to dominate the checkout process, striving to create the highest-converting checkout experience. Even a small increase in conversion rates can have a massive impact on merchant revenue. For example, improving conversion from 50% to 55% represents a 10% revenue boost, making merchants more willing to pay for the service. Expansion Beyond E-Commerce and Venmo’s Role PayPal is also expanding beyond e-commerce with its debit card, positioning itself as the primary payment method. Venmo remains a key growth driver, though it operates on lower margins. While I personally don’t see the hype around Venmo, it is highly popular in the U.S. Total payment volume is growing at 10%, but due to lower margins, transaction margin growth is only at 7%, and revenue growth follows suit.

Guidance

Looking ahead, PayPal is projecting transaction margin growth of 4–5%, which is crucial since it accounts for roughly 50% of their revenue. While 5% revenue growth isn’t bad, it’s far from the rapid expansion of a high-growth tech stock. Their take rate has stabilized, but they now need to drive underlying growth.

That said, I don’t see PayPal disappearing. They will continue to compete, but significant revenue acceleration may take years. I estimate growth around 6%, possibly reaching 7%. They are targeting $6–7 billion in free cash flow, with most of it allocated to share repurchases. However, they currently lack excess cash reserves.

Free Cash Flow

Free cash flow has surged 60%, but it started from a low point, so this increase is largely a recovery. Still, the overall trend in free cash flow is upward. Active accounts are growing at 2%, which is expected since nearly everyone already has a PayPal account—similar to how Meta continues to grow at 3%. More importantly, payment transactions per account are increasing at a faster rate (5%), indicating deeper engagement.

Free Cash Flow and Market Cap Multiple

If we take the projected $6.5 billion in free cash flow and subtract $1.2 billion in stock-based compensation, we get a net figure of $5.3 billion. This results in a market cap multiple of 13. Based on this, we currently see about $5.2 per share in cash flow after accounting for stock-based compensation.

Investment Thesis

A crucial part of their investment thesis right now is their share buyback strategy. With the stock price so low, they can repurchase a substantial amount of shares. They expect to allocate $6 billion for buybacks in 2025, equating to nearly 10% of the company. However, stock-based compensation remains high at $1.2 billion, meaning the net buyback effect will be closer to $5 billion—still a solid return but not as significant.

They have already allocated a significant portion of their free cash flow to share buybacks, so I don’t expect them to increase it much—maybe a slight increase, but they’re unlikely to take on heavy debt. They also likely want to maintain flexibility for potential acquisitions, as they’ve done in the past. However, they haven’t made any acquisitions recently.

Risks and Challenges

Competitive Landscape and Growth Limitations

Competition remains intense—PayPal is up against "buy now, pay later" players like Klarna and Afterpay, Apple in payments, Stripe in processing, Visa and Mastercard in traditional transactions, and even Google. With revenue growth expected to remain in the 5–8% range, PayPal is unlikely to command a high valuation multiple anytime soon.

Valuation

A 15x multiple seems reasonable for a company with high margins and some growth potential. Based on that, the fair value estimate would be around $87—about a 35% discount from the current price. This implies an expected return of roughly 12%, which is solid but not a steep discount.

With a market cap of around $70.5 billion and projected free cash flow of $6–7 billion, PayPal is trading at roughly 10 times free cash flow, translating to a 10% free cash flow yield. This suggests that PayPal could deliver a 10% return to shareholders through buybacks alone.

Discounted Cash Flow (DCF) Valuation Assuming:

• 4% annual free cash flow growth

• 5% annual share buybacks

• A 15x free cash flow multiple The fair value of PayPal stock would be around $96 per share, implying a potential 17% annual return.

Upside Potential and Best-Case Scenario

However, there’s upside potential. If PayPal grows slightly faster and competition eases in five years, allowing for more expansion, a higher multiple (around 18x) could push the stock toward $140—essentially doubling from its current level.

Downside Risks and Worst-Case Scenario

On the downside, if competition intensifies and margins are squeezed, leading to no revenue growth beyond buybacks, a 10x multiple could push the stock down by 50%. That said, at lower multiples, PayPal would also be able to repurchase more shares, offsetting some of the downside impact.

Market sentiment

Growth Assumptions and Future Outlook

Assuming PayPal grows at around 6% annually, combined with a 7% buyback yield, this would give them a total growth rate of approximately 13%. However, I expect a slight slowdown in the future, as competition is unlikely to ease, and market share gains will be difficult. This is already a fairly conservative outlook, assuming PayPal never achieves significant growth.

Following the earnings announcement in Feb, PayPal's stock experienced a decline, primarily due to adjusted earnings falling short of analyst expectations. The company reported adjusted earnings of $1.21 billion, below the consensus estimate of $1.44 billion.

Conclusion

Despite looking undervalued, I lack conviction in PayPal’s long-term growth. The company faces competitive headwinds, and newer payment processors, like Four, are growing faster while not trading at significantly higher valuations. PayPal’s slower growth compared to competitors raises concerns about its quality as a long-term investment.

Overall, PayPal presents a strong risk-reward profile, though not as attractive as it was at $53 when I first analyzed it. If it drops to around $60, I would likely buy, as it would fit well in my portfolio. What do you think about PayPal? I see it as a fantastic company facing some challenges, but at this price, the valuation is more than justified.

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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