PayPal is a global leader in digital payments, leveraging its extensive network, proprietary technology, and continuous innovation to drive growth. With strong tailwinds from the expansion of e-commerce, increasing adoption of digital wallets, and new revenue streams in advertising and checkout optimization, the company is well-positioned for the future. However, risks such as competition, cyberattacks, and macroeconomic pressures remain. The question is: Should PayPal be part of your portfolio?
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should mention that at the time of writing this analysis, I do not own shares in PayPal or any of its direct competitors. If you are interested in copying my portfolio or viewing the stocks I currently own, you can find instructions on how to do so here. I have no personal stake in PayPal, which means it should not be difficult to maintain an unbiased analysis. If you want to purchase shares or fractional shares of PayPal, you can do so through eToro. eToro is very user-friendly and easy to get started with. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.
The Business
PayPal Holdings, Inc. is a global leader in digital payments, facilitating transactions between consumers and merchants across more than 200 countries. Originally founded in 1998 and later spun off from eBay in 2015, PayPal has established itself as a dominant force in online payments. The company operates a two-sided payments platform with 434 million active accounts, processing $1,7 trillion in total payment volume in 2024. It generates revenue through transaction fees, currency conversion, instant transfers, and financial services such as buy now, pay later, merchant financing, and cryptocurrency transactions. Its portfolio includes Venmo, Braintree, Xoom, and Zettle, offering both digital and in-person payment solutions. PayPal’s moat is rooted in several factors. Its two-sided network creates a reinforcing cycle: a large merchant base attracts more consumers, while consumer adoption encourages merchants to continue offering PayPal as a payment option. This scale makes it difficult for competitors to displace its position. Brand trust is another key strength, with PayPal ranking among the world’s most trusted brands according to Infegy. Consumers and businesses rely on its security and ease of use, driving high engagement and repeat transactions. Unlike ecosystem-dependent competitors such as Apple Pay or Google Pay, PayPal’s platform-agnostic approach allows it to operate seamlessly across devices and operating systems. Merchants benefit from a mix of branded payment solutions like PayPal and Venmo, as well as unbranded processing through Braintree, giving them greater flexibility in managing transactions. Beyond transaction fees, PayPal has diversified revenue streams, including instant transfers, foreign exchange, merchant lending, buy now, pay later, and cryptocurrency services. This broad monetization strategy reduces reliance on any single revenue source and strengthens its long-term growth prospects.
Management
Alex Chriss became PayPal's CEO in September 2023, bringing over two decades of experience in leveraging technology to solve financial challenges. Before joining PayPal, he spent nearly 20 years at Intuit, where he led the transformation of QuickBooks into a cloud-based platform, integrating artificial intelligence and machine learning to enhance user experience. He also played a pivotal role in Intuit's $12 billion acquisition of Mailchimp, successfully integrating the company into Intuit's ecosystem. Since taking the helm at PayPal, Alex Chriss has focused on expanding the company's role beyond payments, aiming to establish it as a comprehensive commerce platform. He has initiated efforts to provide merchants with valuable consumer insights derived from transaction data, enabling more personalized and effective marketing strategies. Additionally, Alex Chriss has overseen the launch of new services like "Fastlane," a guest checkout option designed to streamline the online purchasing process. Under his leadership, PayPal has also emphasized financial inclusion, developing solutions tailored for underserved communities. Alex Chriss's strategic vision includes leveraging PayPal's extensive network to facilitate better connections between merchants and consumers, thereby enhancing the overall commerce experience. I believe that Alex Chriss has had a great start as the CEO of PayPal, and he is the right person to lead the company moving forward. His extensive experience in technology and product leadership, combined with a proven track record of driving growth and innovation, positions him well to steer PayPal through its next phase.
The Numbers
The first number we will investigate is the return on invested capital, also known as ROIC. We want to review a 10-year history, with all figures exceeding 10% for each year. PayPal has consistently delivered a solid ROIC since its IPO, with only three out of nine years falling below the 10% threshold. However, two of those years were immediately after its IPO and were close to reaching 10%. The company also fell short in 2022, though macroeconomic headwinds made it a difficult year for most businesses. Despite PayPal’s strong market position, its ROIC hasn't reached the levels one might expect. One reason is its continuous investment in technology, security, and product expansion. While these investments are crucial for maintaining long-term competitiveness, they have placed pressure on profitability. Another factor is the rapid growth of Braintree, which operates at a lower margin and higher expense rate compared to PayPal's core branded checkout business. As Braintree has become a larger part of total revenue, overall profitability has been impacted. However, management has expressed its intent to improve Braintree’s profitability, which could contribute to higher ROIC in the future.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it moving forward. As you are accustomed to seeing numbers in percentage form, I have decided to share both the actual numbers and the year-over-year percentage growth. PayPal has steadily grown its equity in most years, with only three out of ten years showing a decline compared to the previous year. In 2022, like many other companies, PayPal faced macroeconomic headwinds that impacted its financial performance. The decline in 2024, however, is largely due to PayPal using debt to repurchase shares at what I consider a very attractive price. Given the valuation at which these buybacks occurred, I view this as a smart capital allocation decision by management rather than a cause for concern.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that the margin provides a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Not surprisingly, PayPal has delivered positive free cash flow in all ten years since its initial public offering (IPO). In 2024, the company achieved a record high free cash flow, which is particularly encouraging as it marks the first full year under the new management team. PayPal has guided for free cash flow in 2025 to remain at similar levels to 2024, despite planned increases in capital expenditures and tax-related headwinds. The levered free cash flow margin is at its fourth-highest level ever and the highest since 2020, reinforcing PayPal’s ability to generate strong cash flows. Management has stated that optimizing free cash flow is a priority going forward, suggesting that margins could improve further in the coming years. Additionally, PayPal’s free cash flow yield is at its highest level ever, indicating that the company is trading at a historically attractive valuation. However, we will revisit valuation later in the analysis.
Debt
Another important aspect to investigate is the level of debt, specifically whether a business has manageable debt that can be paid off within a period of three years. We assess this by dividing total long-term debt by earnings. For PayPal, this calculation shows that the company has 2,38 years of earnings in debt, which remains below the three-year threshold. This suggests that debt is not a concern when considering an investment in PayPal. While debt increased slightly in 2024 despite higher earnings, this was due to the company using debt to repurchase shares at a very attractive valuation. I view this as a shareholder-friendly decision, as it enhances long-term value. Since its IPO, PayPal has only exceeded three years of earnings in debt once, indicating a consistent approach to debt management. Given its historical track record, I do not anticipate debt becoming an issue for the company in the future.
Exclusive Discounts on Seeking Alpha – Elevate Your Investing Today!
For those serious about investing, here's your chance to upgrade your strategy with exclusive offers you won't find anywhere else. These special discounts are available only through the links below—don’t miss out!
Seeking Alpha Premium: Access comprehensive financial data, earnings transcripts, in-depth analysis, market news, and more. Perfect for investors who want an edge in making informed decisions.
Special Price: $269/year (originally $299) + 7-day free trial.
Alpha Picks: Get stock recommendations from a portfolio that gained +177% compared to the S&P 500's +56% from July 2022 through the end of 2024.
Special Price: $449/year (originally $499).
Alpha Picks + Premium Bundle: The ultimate investment package with a $159 discount!
Special Price: $639/year (originally $798).
I use Seeking Alpha daily for its reliable insights and actionable strategies. These deals are available exclusively through my links, so take advantage of them now to level up your investment journey!
Act quickly - these prices won't last forever!
Risks
Competition is a risk for PayPal as the global payments industry is highly competitive, dynamic, and constantly evolving. PayPal faces competition from traditional financial institutions, technology companies, payment processors, and emerging fintech players, all of which have different strengths that could erode its market share, pricing power, and profitability over time. One of the key risks is the rapid pace of innovation and shifting consumer preferences. Many of PayPal’s competitors, particularly younger fintech firms, are highly agile and quick to adapt to technological advancements, regulatory changes, and evolving user demands. Companies such as Stripe and Square (Block) have gained traction with modern, developer-friendly payment solutions and embedded financial services that appeal to online merchants. Meanwhile, Apple Pay and Google Pay offer seamless, integrated payment solutions that are gaining adoption, particularly in mobile and in-person transactions. PayPal also faces significant pressure from large, established financial institutions and credit card networks such as Visa, Mastercard, and major banks. These entities continue to expand their offerings, making direct peer-to-peer transfers, contactless payments, and card-on-file solutions more accessible. Another major challenge is price sensitivity and merchant competition. Businesses that use PayPal’s payment processing services often compare its fees to those of competitors. Some rivals offer lower-cost alternatives or bundled solutions that include value-added services such as analytics, fraud prevention, and personalized marketing. PayPal’s Braintree segment, which powers unbranded payment processing for major merchants, competes directly with Stripe and Adyen, both of which have optimized pricing and infrastructure that make them attractive to large enterprises. If PayPal is forced to lower its take rates to retain merchants, its margins could decline.
Cyberattacks pose a risk for PayPal. As a global leader in digital payments, PayPal processes a vast number of financial transactions daily, making it a prime target for cybercriminals. The company handles sensitive customer data, including payment details, personal identities, and financial records, meaning any security breach could have serious consequences for its reputation, operations, and financial health. One of the main risks PayPal faces is the evolving sophistication of cyber threats. Attackers, ranging from individual hackers to well-coordinated cybercriminal organizations and even state-sponsored entities, are constantly developing new methods to infiltrate secure systems. These threats include ransomware, distributed denial-of-service (DDoS) attacks, social engineering, phishing schemes, and direct hacking attempts on PayPal’s systems or those of its partners and vendors. Another major risk stems from data breaches involving customer information. If cybercriminals gain access to payment data, usernames, passwords, or multi-factor authentication credentials, they could execute fraudulent transactions, steal identities, or sell stolen data on the dark web. Such incidents would not only cause direct financial losses but could also erode consumer trust in PayPal’s security. Any perceived vulnerability may prompt users to shift to alternative payment platforms, weakening PayPal’s competitive position. A major cyberattack could also disrupt PayPal’s operations, making its payment services temporarily unavailable. Given PayPal’s role as a trusted payment processor for millions of merchants, any prolonged outage could lead to lost transactions, merchant dissatisfaction, and damage to its brand reputation.
Macroeconomics is a risk for PayPal. The company's business is highly sensitive to global and regional economic conditions, as consumer spending, e-commerce activity, and financial market stability directly impact its transaction volumes and overall revenue. Economic downturns, financial market disruptions, and shifts in monetary policy create risks that affect both consumer behavior and PayPal’s ability to operate efficiently. One of the most significant macroeconomic risks is recessionary pressure and reduced consumer spending. PayPal’s revenue is largely driven by transaction fees, making its performance closely tied to consumer confidence and purchasing trends. During economic slowdowns, consumers typically cut back on discretionary spending, leading to a decline in total payment volume processed through PayPal’s platform. Additionally, businesses—especially small and medium-sized enterprises—may experience lower sales, further reducing merchant activity on PayPal’s network. Inflationary pressures also pose a challenge. Persistent inflation erodes consumer purchasing power, which can lead to lower transaction volumes. At the same time, rising costs for businesses may result in reduced investment in digital payment infrastructure, affecting PayPal’s growth prospects. Inflation also increases PayPal’s own operating expenses, particularly in areas such as customer service, technology infrastructure, and regulatory compliance. Interest rate fluctuations present another key macroeconomic risk. Rising interest rates increase borrowing costs for consumers and businesses, potentially leading to lower credit card usage and reduced online spending. Additionally, higher rates impact PayPal’s financing products, including its buy now, pay later services and merchant loans, by increasing default risks or reducing demand for short-term credit solutions. Conversely, if interest rates decline sharply due to a weak economy, PayPal’s ability to generate yield on customer balances may be negatively affected, reducing its interest-related revenue.
Reasons to invest
Branded checkout is a key reason to invest in PayPal, as it plays a critical role in driving transaction margin growth, improving conversion rates, and increasing PayPal’s share of wallet among both merchants and consumers. One of PayPal’s biggest strengths in branded checkout is its ability to drive higher consumer engagement and spending. The integration of Buy Now, Pay Later (BNPL) within its checkout experience has been particularly effective. In 2024, PayPal’s total BNPL payment volume grew 21% year-over-year. BNPL customers spend 30% more on average, and merchants that add BNPL messaging to their sites see higher sales and conversion rates. As BNPL adoption expands, PayPal stands to capture a greater share of consumer spending while providing merchants with tools to boost revenue. PayPal has also improved its checkout experience, particularly on mobile, where it previously lagged. Throughout 2024, the company focused on refining the interface, optimizing user flows, and introducing new pay sheets that make the branded checkout process faster and more seamless. These innovations are already showing results, with 25% of U.S. branded checkout volume now flowing through PayPal’s most modern checkout experiences. As these improvements scale globally in 2025, PayPal expects continued growth in branded transactions and higher customer retention. Venmo’s increasing monetization further strengthens PayPal’s branded checkout offering. Venmo’s total payment volume grew 10% in 2024, and the company has been actively integrating Venmo into branded checkout experiences, increasing adoption across major merchants. This not only expands Venmo’s utility beyond peer-to-peer payments but also positions PayPal as a more attractive checkout option for consumers who prefer digital wallets over traditional credit or debit cards.
Fastlane is a reason to invest in PayPal. It is a major innovation within PayPal’s checkout ecosystem, enhancing its ability to improve conversion rates, attract new users, and re-engage dormant customers. As a frictionless guest checkout solution, Fastlane allows users to save their payment and shipping details, eliminating the need for manual entry in future purchases. This not only improves the consumer experience but also increases merchant sales and checkout efficiency. One of Fastlane’s most compelling advantages is its ability to bring new and inactive users into PayPal’s ecosystem. Early data shows that 25% of Fastlane users have never had a PayPal account, while another 50% were inactive for the past 12 months. This means that 75% of Fastlane users are either completely new or reactivated customers, highlighting its potential to expand PayPal’s user base and increase engagement. By offering a seamless guest checkout experience, PayPal is effectively creating a gateway for these users to discover and adopt other PayPal services, including branded checkout, Buy Now, Pay Later, and Venmo. From a merchant perspective, Fastlane is already delivering double-digit improvements in checkout conversion rates. Merchants are eager to implement it because a smoother checkout process reduces cart abandonment and increases completed purchases. Large brands have already signed on, and PayPal is working to integrate Fastlane with Adyen, Global Payments, and other major payment processors in 2025, significantly expanding its adoption. As Fastlane scales, it has the potential to drive meaningful volume growth across PayPal’s transaction network. Another key benefit of Fastlane is its strategic role in PayPal’s broader ecosystem. While Fastlane is separate from PayPal’s branded checkout, it serves as an entry point for users who may later opt into PayPal’s full suite of services. PayPal has also begun marketing additional incentives to Fastlane users, reminding them of the benefits of a PayPal account. This re-engagement strategy could convert guest users into recurring PayPal customers, driving long-term transaction growth.
PayPal’s expansion into advertising represents a high-margin growth opportunity that leverages its vast transaction data and customer insights. By integrating Smart Receipts and the Advanced Offers Platform, PayPal is positioning itself to capitalize on personalized commerce and targeted promotions, providing both merchants and consumers with greater value while enhancing its own monetization capabilities. One of the key innovations is Smart Receipts, a feature that transforms the post-purchase experience by allowing merchants to include personalized product recommendations and cashback offers on receipts. Since 45% of PayPal customers open their receipts, this creates a powerful channel for merchants to engage with consumers even after a transaction is completed. By using AI-driven insights, PayPal can predict what customers may want to buy next from a given merchant, increasing the likelihood of repeat purchases and fostering stronger customer relationships. The Advanced Offers Platform takes this personalization further by allowing merchants to target customers based on their actual purchase history across the internet. This goes beyond traditional digital advertising by leveraging PayPal’s unique consumer insights, enabling businesses to serve dynamic and highly relevant promotions. With 83% of consumers wanting customized discounts but only 44% receiving them, PayPal has an opportunity to fill this gap and provide merchants with a more effective way to reach their target audience. Entering the advertising space is strategically significant for PayPal because it offers a high-margin revenue stream that complements its core payments business. Unlike transaction-based revenue, which is subject to competition and pricing pressures, advertising revenue has the potential to scale with minimal incremental costs. Given that 300 million Smart Receipts are opened monthly, PayPal already has a built-in audience that can be leveraged to drive incremental advertising revenue. Beyond revenue generation, these innovations strengthen PayPal’s merchant relationships. By providing businesses with tools to increase visibility, drive customer engagement, and boost sales, PayPal enhances its value proposition as more than just a payment processor. This could lead to higher merchant retention and deeper integration into their digital marketing strategies, further embedding PayPal into the e-commerce ecosystem.
Unlock Your Trading Potential with VIP Indicators
Transform your trading with VIP Trading Indicators - powerful, AI-driven tools designed to make you a more confident and profitable trader. Whether you're a beginner or an experienced investor, these indicators help you identify when to buy, sell, or take profit with up to 93% accuracy.
Here’s what makes VIP Indicators stand out:
Easy Setup in Just 1 Minute: Start trading profitably right away, even if you have zero experience.
Works on Any Market: Use VIP Indicators on stocks, forex, crypto, and more.
24/7 Support & Free Trading Course: Get live help and step-by-step guidance to maximize your results.
For just $9, you’ll gain instant access to all the tools, plus a 30-day risk-free guarantee. If it’s not the right fit, simply request a refund—no questions asked.
Take control of your trading journey today and see what VIP Indicators can do for you. Click here to start now!
Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,99, which is from 2024. I have selected a projected future EPS growth rate of 11%. Finbox expects EPS to grow by an average of 10,9% in the next 5 years. Additionally, I have selected a projected future P/E ratio of 22, which is double the growth rate. This decision is based on PayPal's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $61,61. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy PayPal at a price of $30,81 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 7.315, and capital expenditures were 614. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 430 in our calculations. The tax provision was 1.182. We have 993 outstanding shares. Hence, the calculation will be as follows: (7.315 – 430 + 1.182) / 993 x 10 = $81,24 in Ten Cap price.
The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With PayPal's free cash flow per share at $6,75 and a growth rate of 11%, if you want to recoup your investment in 8 years, the Payback Time price is $88,86.
Conclusion
I believe that PayPal is an intriguing company with strong potential, while management has done a great job in improving operations. The company has historically achieved an acceptable ROIC above 10% in most years and has just delivered its highest free cash flow ever. Competition is a risk for PayPal as it operates in a rapidly evolving and highly competitive payments industry, facing pressure from traditional financial institutions, fintech companies, and major technology firms like Apple and Google. Rivals with lower fees, superior technology, or integrated ecosystems could erode PayPal’s market share, force price reductions, and limit its profitability over time. Cyberattacks pose a risk for PayPal as its role in processing sensitive financial transactions makes it a prime target for cybercriminals, including hackers and state-sponsored entities. A major breach could lead to financial losses, reputational damage, loss of consumer trust, and operational disruptions, potentially driving users to alternative payment platforms. Macroeconomic conditions also present a risk, as PayPal’s business is closely tied to consumer spending, e-commerce activity, and financial market stability. Economic downturns, inflation, and interest rate fluctuations can reduce transaction volumes, increase operational costs, and impact demand for PayPal’s financing products, potentially limiting revenue growth and profitability. Branded checkout is a compelling reason to invest in PayPal, as it drives transaction margin growth, improves conversion rates, and increases consumer engagement. With the integration of Buy Now, Pay Later and Venmo, along with enhancements to its checkout experience, PayPal is expanding its market share while providing merchants with tools to boost sales and customer retention. Fastlane further strengthens PayPal’s investment case by enhancing checkout efficiency, improving conversion rates, and attracting new and dormant users into PayPal’s ecosystem. By streamlining guest checkout and integrating with major merchants, Fastlane has the potential to drive significant transaction volume growth while increasing user engagement with PayPal’s broader suite of services. Advertising introduces an additional high-margin revenue stream that leverages PayPal’s transaction data and customer insights. Through innovations like Smart Receipts and the Advanced Offers Platform, PayPal enhances merchant engagement, drives personalized promotions, and expands its monetization opportunities beyond payment processing. I believe PayPal is heading in the right direction, and buying shares below the Ten Cap price of $81 could be a good long-term investment for the patient investor.
My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, you can read this post.
I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. If you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.
Some of the greatest investors in the world believe in karma, and in order to receive, you will have to give (Warren Buffett and Mohnish Pabrai are great examples). If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to Rolda Animal Rescue. It is an organization that is helping the animals in Ukraine, and they need all the help they can get. If you have a little to spare, please donate here. Even a little will make a huge difference to save these wonderful animals. Thank you.
Comments