PayPal: Time to Strike With Shares Down Double Digits?

Key Points

• PayPal is down big after its latest earnings release despite beating topline and bottom-line estimates.
• The company's focus on profitable growth is causing consternation around losing market share.
• Is this drop just a bump in the road to the stock's longer-term success?

 

Payments giant PayPal NASDAQ: PYPL has had an unimpressive start to 2025, based on the returns of the stock. However, some argue it is unjustifiable for the stock to be down nearly 11% as of the Feb. 12 close. Differences in opinion largely stem from what investors took away from the company’s latest earnings report on Feb. 4.

The financials stock beat on revenue and adjusted earnings per share (EPS), yet shares fell over 13% in one day. Does this mean there is now a prime buying opportunity in PayPal stock, or is the drop a sign of things to come? I’ll break down the key points of contention in the report and answer this ultimate question.

Earnings: Good News on the Top and Bottom-Line

On the top line, PayPal's revenue grew by 4% in Q4 2024 compared to Q4 2023. Its nearly $8.4 billion in revenue was about 1% higher than analysts surveyed by FactSet expected. Additionally, the company’s $1.19 adjusted EPS was 6% higher than anticipated. The midpoint of both Q1 2025 and full-year 2025 adjusted EPS also came in significantly above forecasts. Lastly, PayPal’s Board of Directors approved a large $15 billion share buyback program, which is often seen as a positive for shareholders. So why, then, did PayPal shares retreat so significantly after the release?

Breaking Down Underlying Metrics Causing Trepidation

Much of the concern revolved around a key part of the business: branded checkout. This is where online sellers provide consumers with a PayPal-branded checkout option when making a purchase. Customers who already have a PayPal account can simply click a few buttons to make the purchase. This prevents them from having to enter lengthy credit card information, which may prevent them from purchasing at all.

The value add is that sellers complete more sales, increasing revenue even though they must give PayPal a cut. Branded checkout payment volume growth of 6% was lower than hoped. PayPal’s Chief Executive Officer called branded checkout the company’s “number one priority” in early 2024. Thus, failing to meet expectations on this metric shows the firm’s execution isn’t up to par on a key goal. However, it's important to note that branded checkout volume still grew at a solid 6% clip, an acceleration from 5% in Q4 2023.

Another important focus was PayPal’s unbranded payment processing, known as Braintree. It fell from 29% growth to just 2%. However, profitability improved. The company is letting customers who aren’t profitable go, improving margins at the expense of growth. PayPal expects merchant renegotiations to improve Braintree margins by 1% in 2025 while hurting revenue growth by 5%. The company is boosting margins by advocating for the value of its extra services beyond payment processing in negotiations. Given the difference between margin benefit and revenue growth, this is clearly a strategy that is going to take a while to pay off.

Final Thoughts on PayPal's Opportunity

At this point, the market clearly seems to be prioritizing growth over the profitability strategy that PayPal is pursuing. The gap between PayPal and market priorities suggests that PayPal shares may face short-term downside.

However, one thing that PayPal has that is difficult to ignore is very strong free cash flow generation. It plans to generate $6.5 billion in free cash flow in 2025. That gives it a forward price to free cash flow ratio of just under 12x as of the Feb. 12 close. That’s much cheaper than most of its competitors, but it is also growing much slower than companies like Affirm NASDAQ: AFRM. This leads to concerns over the company’s competitive position. Still, the company maintains a massive lead in market share, according to data from Statista.

I think PayPal stock represents a solid risk-reward opportunity at this point. The company's strong position feels overlooked. Its focus on long-term profits is causing an overreaction to short-term growth-reducing headwinds. The company’s Investor Day is an important event. It will provide details on the progress of its strategy. It could also showcase new and exciting initiatives.

Overall, there was a mixture of Wall Street analysts lowering and raising price targets after the company’s earnings call. Among four price target updates tracked by MarketBeat, the average was a target of $97 per share. The implied upside of this average comes in at 27%.