We came across a bullish thesis on PayPal Holdings, Inc. (PYPL) on Substack by Stefan Waldhauser. In this article, we will summarize the bulls’ thesis on PYPL. PayPal Holdings, Inc. (PYPL)’s share was trading at $70.48 as of March 7th. PYPL’s trailing and forward P/E were 17.66 and 14.10 respectively according to Yahoo Finance.
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PayPal delivered a mixed financial performance in 2024, with net revenue growing 7% to $31.8 billion, though Q4 revenue increased by just 4%. This slowdown was largely due to the company’s deliberate strategy to forgo unprofitable revenue streams, particularly in its B2B business. Despite this, PayPal’s free cash flow surged by 60% to $6.8 billion, a key indicator of its financial strength. GAAP operating income increased 6% to $5.3 billion, while non-GAAP operating income grew at a more impressive 14% to $5.8 billion, reflecting the company’s focus on improving profitability. However, earnings per share failed to impress, with GAAP EPS rising only 4% to $3.99, though non-GAAP EPS grew 21% to $4.65. The company’s total payment volume (TPV) grew 10% to $1.68 trillion, while active accounts increased modestly by 2.1% to 434 million, with engagement levels improving as transactions per account rose by 4%. Despite this, PayPal’s share price declined following the earnings release, highlighting investor concerns over the company’s growth trajectory and competitive positioning.
To address its structural inefficiencies and unlock its full potential, PayPal has embarked on a major transformation under its new management. A key initiative is the development of “PayPal Open,” a consolidated backend that will unify the company’s fragmented ecosystem of acquired products, including Braintree, PPCP, Zettle, and Xoom. This move will streamline operations, enhance user experiences, and foster innovation, positioning PayPal to compete more effectively with agile rivals like Stripe. Additionally, PayPal is launching the “PayPal Commerce API,” enabling seamless integration for partners and businesses, with an initial rollout to 80 million U.S. consumer profiles. The company is also doubling down on its dual-brand strategy, leveraging the PayPal brand for most products while maintaining Venmo as a distinct and highly popular offering among younger users. Venmo, which boasts 62 million monthly active users, is expected to surpass $2 billion in revenue by 2027 as PayPal seeks to monetize its strong user base more effectively.
Capital allocation remains a core focus, with PayPal maintaining a strong balance sheet, ending 2024 with $15.4 billion in cash and $11.1 billion in debt. The company returned $6 billion to shareholders through aggressive share repurchases, reducing outstanding shares by over 7%. A newly announced $15 billion buyback program could further reduce shares outstanding by 20% at current prices, reinforcing the company’s commitment to returning value to investors. Looking ahead to 2025, PayPal has set a minimum 5% growth target for transaction margin dollars, while analysts anticipate 4% revenue growth. Non-GAAP EPS is projected to rise between 6% and 10%, with GAAP EPS expected to grow over 20%, driven in part by continued share repurchases. Free cash flow is forecasted to remain strong at $6-7 billion, with nearly all of it earmarked for buybacks.
Despite near-term hurdles, PayPal’s strategic transformation and disciplined capital allocation create a strong investment case. If the company executes effectively, its stock could undergo a significant re-rating, making the current valuation an appealing entry point. With a free cash flow to enterprise value ratio of 10—last seen in August 2024 before a 50% rally—PayPal appears undervalued. While competition from Apple Pay and Google Pay remains a challenge, CEO Alex Chriss is driving much-needed modernization. Though the turnaround will take time, long-term investors could see the stock climb above $100, offering a compelling opportunity for those willing to be patient.
PayPal Holdings, Inc. (PYPL) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 94 hedge fund portfolios held PYPL at the end of the fourth quarter which was 90 in the previous quarter. While we acknowledge the risk and potential of PYPL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than PYPL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.