PayPal Trades at Less Than 8X Earnings. Is This a Bargain or a Value Trap?
Key Points
PayPal trades at a valuation more appropriate for a zero-growth utility.
The recent CEO shake-up has created significant uncertainty.
If new CEO Enrique Lores can turn things around, PayPal could be a bargain.
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At just 7.6 times earnings, PayPal (NASDAQ: PYPL) is essentially priced like a mature utility stock. This may seem odd for a company that is generating $6 billion or more in annual free cash flow, has a loyal customer base of nearly 440 million active accounts, and is buying back stock hand over fist.
To be fair, although PayPal is a very cheap stock by most metrics, there's also significant uncertainty about the company's future. In this article, we'll take a look at some of the reasons to buy PayPal, as well as some reasons investors may want to take a cautious approach.
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Anemic growth led to a big change at the top
As mentioned, PayPal is a highly profitable business. It generated $6.4 billion in adjusted free cash flow last year, grew adjusted EPS by 14% year over year, and reduced its outstanding share count by about 8% through aggressive buybacks.
But there's a difference between cheap and "cheap for a reason," and for the time being, PayPal fits into the latter category.
Earlier this year, PayPal unexpectedly removed CEO Alex Chriss after about 2.5 years at the helm, specifically citing the company's slow turnaround. While Chriss certainly had grand ambitions to make PayPal the dominant leader in payments during the AI revolution, the reality was that actual revenue growth has been minimal. For example, branded checkout volume (PayPal's core product) grew by just 2% in the first quarter. Plus, EPS is expected to decline year over year in the current quarter.
Could PayPal actually turn things around?
New CEO Enrique Lores is known for being excellent at simplifying operations and reducing expenses, not for being an innovator. So, it's understandable that investors believe that PayPal is simply throwing in the towel on Chriss' AI-first future vision.
However, I'm not so sure this is the case. So far, Lores has made moves to simplify the business, including reorganizing the company into three distinct business units. He also aims to produce $1.5 billion in cost savings within the next few years and to "aggressively deploy AI across operations and technology." Plus, Venmo's growth has been quite strong, especially with the "Pay With Venmo" initiative.
The biggest unanswered question right now is whether Lores can turn things around and produce sustainable, profitable growth. Investors are skeptical, and rightly so, especially because Chriss (who has much more of an innovator reputation) was unable to produce acceptable results in over two years. If Lores can deliver strong revenue growth and maintain strong margins, PayPal could be a screaming bargain at the current level. But let's be clear -- that's a big if.
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Matt Frankel, CFP® has positions in PayPal and has the following options: long January 2027 $75 calls on PayPal, long January 2027 $95 calls on PayPal, short January 2027 $135 calls on PayPal, and short January 2027 $85 calls on PayPal. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: short June 2026 $50 calls on PayPal. The Motley Fool has a disclosure policy.
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