To The Moon

$PayPal(PYPL)$

Today, we’re taking a look at PayPal. This is a stock I used to own but recently sold. However, with the stock down about 10% pre-market, I’m considering whether it might be a good time to get back in. PayPal just released its Q4 earnings, and while the numbers themselves were solid, some of the guidance and growth metrics have raised more questions than answers. We’ll dive into that shortly.

From an investment perspective, it’s important to note that this stock is up 45% over the past year. Its valuation has moved from an attractive 10-11% free cash flow yield down to around 7%. Still, if growth continues, it remains reasonably appealing. We’ll assess the valuation and earnings in detail now.

Earnings Overview

PayPal’s main messaging is centered around transaction margin dollars—a key focus as they aim for profitable growth. Some highlights include:

• Transaction margin dollars (excluding interest on customer balances) up 5% in 2024, with expectations for similar or better growth in 2025.

• Guidance for $6-7 billion in free cash flow for 2025.

• $6 billion in share repurchases for 2025, mirroring 2024 levels.

• A new $5 billion share repurchase authorization, reinforcing PayPal’s focus on stock buybacks.

The buyback yield here is strong—PayPal has reduced its share count from 1.2 billion in 2016 to under a billion today, with further reductions expected. Management sees the current valuation as attractive for repurchases.

Earnings Breakdown

For Q4 2024, PayPal posted solid results:

• Revenue growth exceeded expectations (beating the 3.5% forecast to reach 4%).

• EPS came in at $1.19, above the $1.12-1.13 expectation.

• Transaction margins continued to grow.

However, there were notable signs of deceleration:

• Total Payment Volume (TPV) growth is slowing.

• Revenue and EPS growth are also decelerating.

• Transaction margin dollars remain stable, but overall growth is slowing.

A key shift in strategy is PayPal’s focus on higher-margin transactions over raw volume growth. They are reducing lower-value transactions—particularly through their Braintree processing business (which handles unbranded card payments).

Fundamental Analysis

PayPal’s strategy shift—trading volume for profitability—could be a good long-term move, but in the short term, it’s impacting growth. Investors will be watching to see whether higher-margin products like Branded Checkout and Venmo can pick up the slack.

Looking at PayPal’s overall payments platform:

• Braintree (unbranded card processing) grew 30% in 2023 but slowed to 14% for 2024 and declined 2% year-over-year in Q4.

• This decline is intentional—PayPal is cutting out low-margin transactions to improve profitability.

• While this strategy improves the bottom line, it also means short-term revenue losses.

The big question for investors: Can PayPal offset this lost volume?

So far, the numbers don’t suggest a strong rebound:

• Venmo is growing, but only modestly (8% → 10% YoY).

• Branded Checkout is also accelerating, but not enough to counteract the Braintree slowdown.

While some other merchant services and P2P payments (excluding Venmo) are growing, the bulk of PayPal’s volume still comes from Braintree. Since that’s declining, revenue growth remains uncertain in the long term.

As PayPal continues prioritizing profitability over raw revenue growth, the trade-off is becoming more apparent. Their top line may shrink slightly if this trend continues, and we’re already seeing the impact in Q4 2024 results. Revenue growth is decelerating, but transaction margins are either holding steady or improving—which is a positive sign.

Another key observation is that, despite slowing revenue growth, PayPal is increasing spending on transaction-related expenses. The company is investing in marketing and sales for new product launches like Fastlane and other initiatives. This is affecting the bottom line, with net income still growing, but at a slower pace. While EPS is up, the combination of slower revenue growth and rising expenses isn’t ideal from an investor’s perspective.

2025 Guidance: Where the Market Gets Concerned

PayPal’s 2025 outlook seems solid on paper:

• Transaction margin dollars are expected to grow in both Q1 and full-year 2025.

• EPS guidance is in the 6-10% range, slightly above the 7% market expectation.

• Free cash flow is projected at $6-7 billion, in line with or even above expectations.

• Significant share repurchases continue, which should support the stock price.

However, one major red flag is missing from this guidance—revenue growth.

• For Q1 2025, revenue is projected to be flat to low single digits, slightly below market expectations.

• For full-year 2025, PayPal announced a 5% revenue headwind due to renegotiations with large Braintree customers.This suggests that PayPal is intentionally walking away from some lower-margin business.While this will hurt total revenue, it will not significantly impact free cash flow or transaction margin dollars—which are key priorities for PayPal.

This explains why PayPal’s key message is all about transaction margin dollars rather than revenue. The company is comfortable sacrificing total payment volume if it means strengthening the bottom line.

The Big Question: Is This a Temporary Revenue Dip or a Long-Term Trend?

One of the most critical factors for investors is transaction margin dollars—not just revenue growth. If revenue slows but transaction margins improve, the bottom line will still strengthen, which is worth noting. Since Alex Chriss took over as CEO, transaction margins have been moving in the right direction, which is encouraging.

A major concern in prior years was declining transaction margins, which PayPal has now actively addressed. The company is willing to sacrifice lower-margin business to improve profitability, even if it means slower overall revenue growth in the short term.

What This Means for Investors

Revenue expectations for 2025 will likely need to come down. The market had been expecting 5-6% revenue growth, but with the 5% headwind, PayPal’s revenue growth for the year could end up in the low single digits.

While there is potential upside from Venmo growth and better monetization of PayPal’s branded products, the revenue outlook is more uncertain than before. Investors also need to consider what this means for 2026 and beyond—is this just a one-time adjustment, or is PayPal entering a longer period of slower top-line growth?

PayPal’s response to these concerns is clear:

• Margins are improving.

• The company is shifting focus to more profitable transactions.

• Lower-margin payment volume is being phased out intentionally.

The big question remains: Will this strategy ultimately drive long-term value for investors, or will the market continue to penalize the stock for slowing revenue growth?

Market Perception vs. Long-Term Profitability

It's important to recognize that the market typically reacts negatively to a slowdown in revenue growth. While investors may eventually shift focus to profitability and free cash flow improvements, the initial reaction tends to be bearish. If PayPal continues expanding margins and growing free cash flow over the next few years, the stock could still prove to be a solid long-term investment. However, this shift in strategy requires a reassessment of valuation, which explains why the stock has dropped following the earnings report.

Current Valuation and Market Reaction

As the market opens, PayPal’s stock is trading in the low $80s, reflecting a significant decline after the earnings release. The company remains highly committed to share repurchases, buying back roughly $5 billion worth of shares annually, partially offset by $1-1.5 billion in stock-based compensation. With an $80 billion market cap and a $15 billion buyback authorization, PayPal is positioned to repurchase over 20% of its shares in the next few years—assuming the stock price remains at current levels.

Revenue Growth and Margin Expectations

• 2024 actuals: Revenue grew ~6-7%, with margins in the low 20% range.

• 2025 forecast:Factoring in the 5% headwind from Braintree negotiations, revenue growth is expected to drop to ~1%.Some upside potential exists from Venmo monetization and PayPal’s branded checkout business.Margins remain a key driver of free cash flow, aligning with guidance for $6-7 billion in FCF.

• Beyond 2025: Modest growth of 3-5% annually, alongside continued margin expansion.

These assumptions place PayPal’s long-term free cash flow yield at around 7%, which historically has been a reasonable benchmark for valuation.

Capital Allocation and Future Returns

• No dividend yet, but PayPal may introduce one in the coming years.

• $26 billion in projected buybacks over the next five years (net ~$18 billion after stock-based compensation).

• Excess free cash flow of $8-9 billion, which could be used for further buybacks, a dividend, or acquisitions.

Fair Valuation Scenarios

At current assumptions:

• With a 7% FCF yield, PayPal’s fair value is around $81, implying an expected return of ~10% annually, including buybacks.

• More conservative assumptions (8% FCF yield) would place fair value closer to $73, reducing the expected return to ~7.7%.

• A more aggressive valuation (6% FCF yield) suggests a fair value in the low $90s, with a 12-13% expected return.

Should I Buy PayPal Over the Broader Market?

Would I choose to buy PayPal over simply investing in the broader stock market, given the new reality that revenue growth will be under pressure in 2025? While improving margins will benefit the bottom line, the real question is how this revenue pressure will carry into 2026. PayPal has major Braintree customer negotiations coming up in 2025, and there's uncertainty about whether similar challenges will arise in 2026. This creates a layer of unknowns that makes me cautious.

Even though fair value estimates suggest $81, I’d personally want at least a 10% margin of safety, bringing my ideal entry price into the low $70s. Being more conservative with my free cash flow yield assumptions also lands me in that range. If the stock drops into the high $60s to low $70s, I’d be more interested.

At $81, PayPal isn’t a bad buy—it’s just an okay one. If I were a new investor, I wouldn’t be overly concerned about buying at this price, but I’d also acknowledge that PayPal has struggled with momentum. The market will likely view lowered revenue expectations for 2025 and 2026 as a red flag, which could lead to additional downward pressure.

Watching for Future Catalysts

I’ll be keeping an eye on PayPal’s upcoming Investor Day in the next few weeks. If they present compelling growth plans for Branded Checkout or Venmo, my current assumptions might be too conservative, making today’s price a potential bargain. However, as a conservative investor, I prefer to wait for more margin of safety.

There's also the Honey lawsuit—while I don’t see it as a major issue, it’s something to keep in mind.

Key Takeaways from Q4 & 2024 Earnings

• Q4 and full-year 2024 results were solid, but guidance for 2025 is concerning.

• Braintree’s growth is decelerating, and Venmo + Branded PayPal aren’t accelerating significantly.

• At $81, the stock seems fairly priced, and I’d only revisit if it drops further.

Is PayPal Still a Value Play?

Despite these concerns, PayPal remains an intriguing value investment because of its strong free cash flow yield (~8.4% on 2024 actuals). If they can grow bottom-line profits by 2-3% annually while returning 4-5% to shareholders through buybacks, the stock offers reasonable value at current levels.

However, for me, it’s not compelling enough right now. If PayPal’s free cash flow yield returns to 10-11% (like a few months ago), I’d be more inclined to buy.

Conclusion

For me, $81 seems like a reasonable price, but I personally wouldn’t buy at this level. I previously owned PayPal and exited after a 50% return—for me to reinvest, I’d want a 15% expected return, which would require a stock price in the $60-70 range. While I don’t expect the stock to drop that low, it remains an interesting company to watch if valuation becomes more attractive.

At its current price, PayPal isn’t overvalued, but it’s not a screaming buy either. Investors must weigh the company’s focus on profitability over revenue growth and decide whether they believe in the long-term strategy.

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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