To The Moon

$PayPal(PYPL)$

For much of the past decade, PayPal was considered one of the premier fintech disruptors. But in the current market environment, it has become one of the most disappointing stocks. Once a Wall Street darling trading at nosebleed valuations, PayPal shares are now down a staggering 59% over the last five years. This has left many long-term shareholders disillusioned—and rightly so.

Once priced at a rich 66 times forward earnings, the stock now trades at a far more modest 13 times earnings. The fall from grace reflects a combination of decelerating revenue growth and a dramatic contraction in the company's valuation multiple. But does that mean PayPal is a lost cause—or could it be a misunderstood turnaround story with long-term potential?

The Decline: Slowing Growth, Shrinking Multiple

Revenue growth has been steadily slowing over the past few years, falling from 9.4% to 8%, then 5%, 4%, and now down to just 1.2%. This deceleration is alarming, especially for a company once touted for its growth story. It’s not just slowing growth either—the decline has coincided with a sharp derating in the company’s valuation.

For investors who've been watching PayPal closely, the trend has been disheartening. But despite the weak top-line growth, PayPal has posted solid bottom-line improvements. In the most recent quarter, non-GAAP EPS grew 23% while FX-neutral revenue increased just 1–2%. How is that possible?

Focus Shifts to Profitable Growth

New management has pivoted away from the "grow at all costs" mentality. The CEO has made it clear that PayPal is no longer chasing topline expansion if it comes at the expense of profitability. Instead, the company is pruning lower-margin segments—chief among them Braintree, a non-branded checkout platform with razor-thin margins.

As a result, while revenue growth is under pressure and expected to remain subdued into 2025, management expects margin expansion and profitability to improve materially. By 2026, as renegotiated Braintree contracts begin to normalize, revenue growth could reaccelerate—potentially positioning the company for a more balanced growth trajectory.

Shareholder Patience Required—But May Be Rewarded

For shareholders wondering whether to hold or sell, the next 12–18 months will be critical. If PayPal’s revenue growth doesn’t pick up by Q1 or Q2 of 2026, that could signal deeper, more structural issues. But if the current slowdown is indeed temporary, as management insists, the upside could be meaningful.

One metric reinforcing this narrative is total payment volume (TPV), which continues to grow each quarter. That’s not a sign of a company in decline. Despite fierce competition from Cash App, crypto-based wallets, and other fintechs, PayPal still processes more payments every quarter—a sign of durability and brand entrenchment.

The same goes for user growth. PayPal continues to onboard approximately 2 million new active accounts every quarter, pushing its global user base above 436 million. A dying platform simply doesn’t see this kind of user expansion.

Venmo Reaccelerates, Fintech Headwinds Emerge

Venmo, PayPal’s fastest-growing segment, has also shown signs of renewed strength. After growing 8% in Q1 2024, Venmo’s growth ticked up to 10%—a notable acceleration. As a go-to payment solution for younger demographics, Venmo remains a strategic pillar in PayPal’s long-term relevance.

However, recent macro headwinds are also worth noting. PayPal shares dropped around 6% in a single day after news broke that JPMorgan would begin charging fintechs for customer data access. This could pressure margins and add new operational friction across PayPal’s ecosystem.

Still, competitors like Block, Coinbase, and Robinhood also fell on the news, suggesting it was more of a sector-wide reaction than a PayPal-specific concern.

Strong Free Cash Flow and Buybacks Support the Bull Thesis

Despite the turbulence, PayPal’s financials remain robust. The company expects to generate between $6 billion and $7 billion in free cash flow this year, up from $5 billion last year. With minimal debt and no dividend payments, that cash is being used aggressively to repurchase shares—an increasingly rare trait in today’s tech landscape.

After adjusting for $1.1 billion in stock-based compensation, PayPal should produce around $5.9 billion in “real” free cash flow. With a current market cap near $69 billion, that equates to a free cash flow yield of about 8%.

At that level, PayPal could theoretically repurchase 7–8% of its shares annually. This “cannibal” strategy—coined by Charlie Munger—has the potential to quietly deliver massive shareholder value, especially if executed over a long enough period.

Turning Into a Cannibal Like AutoZone?

This is where the thesis gets interesting. PayPal may no longer be a fast-growth tech stock, but it could evolve into something more enduring: a consistent free cash flow generator aggressively shrinking its share count.

Companies like AutoZone and Home Depot followed similar paths. AutoZone, for example, has grown revenue at just 4–6% annually, but by repurchasing shares at a steady clip, it has delivered enormous gains to long-term investors. Today, it trades at 22 times earnings.

PayPal trades at just 13 times earnings. If it continues buying back shares at 7–8% annually while growing revenues modestly at 5–6%, the math works out. Without even accounting for multiple expansion, investors could see 14–15% annual returns over the next five years.

That’s a stellar outcome, especially in a market that looks increasingly stretched across most sectors.

The Mistake Most Investors Make

A common misconception is that PayPal needs to return to high-double-digit revenue growth to deliver outsized returns. It doesn’t. With the company generating ample free cash flow and repurchasing stock at discounted prices, value can still be created—quietly, methodically, and over time.

The more the market sleeps on PayPal, the more shares it can retire at bargain valuations. As long as the business doesn’t structurally decline, this sets up a compelling risk-reward dynamic.

Verdict: Buy — But With a Time Limit

PayPal isn’t for the impatient. The next few quarters will be pivotal in determining whether the slowdown in growth is truly transitory. If growth reaccelerates by early 2026—as management has indicated—it could trigger multiple expansion and further enhance shareholder returns.

But if growth remains anemic well into next year, investors may need to reconsider their long-term thesis. For now, however, the fundamentals, buybacks, and valuation argue in favor of a patient, long-term bullish stance.

Key Takeaways

1. Valuation Reset: PayPal has dropped 59% over five years and now trades at 13x earnings, down from 66x.

2. Revenue Concerns: Topline growth has slowed dramatically—but margins and EPS are growing faster.

3. Cannibal Play: With an 8% free cash flow yield, PayPal is aggressively buying back shares.

4. User Metrics Strong: TPV and active accounts continue to rise, indicating a resilient platform.

5. Long-Term Returns: Even with just 5–6% revenue growth, investors could see 14–15% annualized returns.

6. Watch Q1/Q2 2026: Growth must return by then, or the turnaround thesis weakens.

Bottom Line: PayPal may never return to its hypergrowth days, but its transformation into a disciplined, cash-generating "cannibal" stock is well underway. If you believe in a return to modest growth and trust management’s pivot to profitable operations, today’s valuation offers an attractive entry point for long-term investors.

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.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub