PayPal No Longer Deserves A Premium Valuation. Here's Why.

PayPal's (NASDAQ: PYPL) share price has stumbled by more than 25% year to date, and the stock now trades at a P/E ratio of 8. However, that doesn't make it a buy right away, and it may never climb to a lofty P/E ratio now that the growth narrative is mostly dead.

A premium valuation requires premium growth

PayPal delivered 7% year-over-year revenue growth in the first quarter, which is well below that of emerging fintech stocks like SoFi Technologies (up 41% in Q1) and Robinhood Markets (up 15%). PayPal's revenue compound annual growth rate (CAGR) has been declining in recent years. It has a 10-year CAGR of 13.9%, but only a 7.2% CAGR over the past three years.

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PayPal isn't delivering high user growth rates either. The company reached 439 million daily active users in Q1, which only represents a 1% year-over-year increase. Meanwhile, Meta Platforms, a company known by almost everyone, delivered 4% year-over-year user growth but turned that into 33% year-over-year revenue growth. More specifically, in fintech, SoFi grew its user base by 35% year over year.

PayPal doesn't have the exciting user growth rates of SoFi, and it can't translate low user growth into surging sales the way Meta Platforms can. PayPal CEO Enrique Lores said in the Q1 press release that he was confident that the company would soon return to "a more durable path to long-term growth," but the multiyear trend makes it an uphill battle.

Competitors are squeezing margins

PayPal didn't have many competitors in its early days, but that has changed. Apple and Alphabet have payment apps that bypass PayPal for transactions, which is how PayPal makes most of its money. Stripe is another major competitor, and as more companies enter the crowded arena, the best way to gain traction is to have lower fees.

This sets up a race to the bottom, and when it comes to such races, Apple and Alphabet can wait out almost anyone. That's not to suggest PayPal will go out of business. It has far too many users and has become an established brand. However, it will make it even more difficult for the company to gain meaningful market share and expand margins in the years ahead, and that can be enough to keep the stock at a low valuation.

PayPal's guidance hints at this reality. The company is projecting a mid-single-digit year-over-year decline in its full-year 2026 GAAP EPS growth rate.

PayPal also initiated a quarterly dividend last year, which further pushes the company away from a growth narrative. A $0.14-per-share quarterly dividend was comfortably covered with a $1.21 GAAP EPS in Q1. However, PayPal paid $130 million in dividends in Q1 while buying back $1.5 billion in stock. These investments add value to shareholders but not to the company.

All of these details suggest that PayPal has matured. Investors should treat its stock like a traditional bank with a yield, rather than expecting it to be a fintech stock that outperforms the S&P 500.

Marc Guberti has positions in Apple. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, and PayPal. The Motley Fool recommends the following options: short June 2026 $50 calls on PayPal. The Motley Fool has a disclosure policy.