PayPal Just Raised Its Profit Forecast, and the Stock Barely Moved. Here’s Why

At first glance, PayPal's (NASDAQ:PYPL) third-quarter results looked rather strong. Adjusted EPS grew by 8% year-over-year and handily beat analyst estimates, and management raised its full-year profit guidance.

However, the stock initially fell modestly after the earnings report, and as of 2 p.m. ET on earnings day, it was higher by just 1%, despite the impressive earnings beat and guidance raise. Here's what is worrying investors, and why a beat and raise isn't enough to move the stock higher.

Image source: PayPal.

Here's what disappointed investors

In the third quarter, PayPal's revenue grew by just 2% to $8.58 billion, which fell short of expectations. Transaction margin dollars, a gross profit indicator, rose by only 2%.

The bigger issue is branded checkout. This is the PayPal button you can click on when shopping online. It's PayPal's most profitable business, but payment volume grew by just 1% on a currency-neutral basis. That is the fourth consecutive quarter that we've seen branded checkout growth in the 1% to 2% range. The company's transaction take rate, which is the share of each dollar it keeps as revenue, declined to 1.58% from 1.64% a year earlier, and management is only forecasting slight growth in transaction margin dollars for the fourth quarter.

What is going well

To be fair, several parts of PayPal's business are performing quite well. Venmo is a standout, with payment volume growing 14% year over year. Buy now, pay later (BNPL) volume grew 25%. And payment volume on PayPal and Venmo debit cards in the United States grew by more than 60%.

These are all becoming significant growth engines for the business, and management expects financial services products like these to make up more than 20% of transaction margin dollars this year. But that still leaves 80% of transaction margin dollars coming from low-growth revenue streams.

The real source of PayPal's earnings growth

PayPal grew its earnings per share by 8%, despite growing gross profit by just 2%. How did this happen? The answer is that cost reductions and buybacks are the primary drivers of earnings growth. The company has eliminated over 2,000 roles and is targeting over $1.5 billion in annual savings over the next few years, and PayPal has spent $6 billion buying back its own stock over the past 12 months, reducing its weighted share count by 11%.

Don't get me wrong. Cost-cutting and buybacks certainly can create value. But it's not the quality earnings growth we'd get from the core business growing again, which is what investors really want to see.

The bottom line is that PayPal trades for less than 10 times its expected 2026 earnings, so there isn't exactly a ton of growth priced in. The market wants branded checkout to grow again, but it isn't confident that management can deliver. And until it does, earnings beats that are primarily fueled by expense reductions and buybacks aren't likely to move the stock too much. I'm holding onto my shares, but I'll be watching branded checkout volume very closely over the next few quarters.

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 December 2026 $62.50 calls on PayPal. The Motley Fool has a disclosure policy.