Is PayPal Stock a Value or a Value Trap?
Key Points
PayPal stock is trading as if it is going bankrupt, despite still growing and generating robust free cash flow.
The company could buy all its shares back in less than eight years at current prices.
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PayPal (NASDAQ: PYPL) is one of the most divisive stocks in the market. The stock of the payments processor trades at a dirt cheap valuation, with a forward price-to-earnings (P/E) ratio of just over 9.5 times 2027 analyst estimates and a free cash flow yield approaching 13%. Meanwhile, the company has rebuffed recent acquisition bids, and Bank of America reinstated coverage with an "underperform" rating.
Investors are worried about the company's lack of revenue growth and about its unbranded processing unit, Braintree, which is largely a commoditized business with little pricing power and intense competition. Despite its flaws, though, I think the fintech stock looks like a buy, as its Q3 earnings report shows a company generating a boatload of cash and still growing.
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PayPal is embracing AI
PayPal turned in solid results and is embracing artificial intelligence (AI) to improve its operations. It is moving its customer records to the cloud and using AI to help modernize its tech stack and innovate faster. At the same time, PayPal is using AI agents to support customer service, helping reduce costs.
PayPal continues to see agentic commerce as a big opportunity. Last year, it formed a partnership with OpenAI and adopted its Agentic Commerce Protocol, which will let ChatGPT users instantly check out with PayPal when shopping on the chatbot. Meanwhile, it is now working with Meta Platforms to integrate PayPal into its personal AI agents. It believes its positioning around trust and security aligns it well with this still-nascent market.
Turning to its results, PayPal's revenue rose 2% to $8.58 billion, while adjusted earnings per share (EPS) climbed 8% to $1.45. Analysts were looking for adjusted EPS of $1.31 on revenue of $8.71 billion, as compiled by S&P Global.
Transaction margin dollars, which are the profits it earns from each payment it processes (similar to gross profit), rose 2% to $3.95 billion. This is one of the most closely watched metrics for PayPal, as in years past much of its revenue growth had come from low-gross-margin, unbranded sources.
Total payment volumes (TPV) jumped 7% on a constant currency basis to $487.1 billion. PayPal-branded checkout TPV rose 6%, while Venmo jumped 14%. Its unbranded payment service provider TPV, home to Braintree, increased by 8%.
Payment transactions grew by 7% to 6.8 billion, while payment transactions per active account rose 6% to 60.8 on a trailing-12-month basis. Active accounts edged up by 1% year over year to 440 million. Monthly active accounts were little changed at 228 million.
PayPal generated $1.4 billion in free cash flow in the quarter and $2 billion when adjusting for the timing impact of buy now, pay later receivables.
Looking ahead, the company forecast Q4 adjusted EPS of about $1.53. It is looking for transaction margin dollar growth to be slightly positive and for low-double-digit percentage constant-currency revenue growth.
For the full year, PayPal increased its adjusted EPS forecast to $5.60, up from an earlier estimate of $5.38. The new estimate represents 5% growth. It expects full-year adjusted free cash flow of more than $6.5 billion and to buy back about $6 billion worth of shares.
Is it time to buy PayPal stock?
PayPal continues to chug along, with modestly growing revenue while focusing on transaction-margin dollar growth. Meanwhile, it's working to expand into financial services while embracing AI and reducing costs. It expects to lower its cost structure by at least $1.5 billion during the next few years.
The company generates a ton of free cash flow and is using most of it to repurchase stock. At its current pace and share price, PayPal could buy back all the stock outstanding in less than eight years.
PayPal isn't going to be confused for a growth stock, but given its free cash flow, solid balance sheet, and continued growth, it looks like a solid value stock to own.
Should you buy stock in PayPal right now?
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Bank of America is an advertising partner of Motley Fool Money. Geoffrey Seiler has positions in Meta Platforms and PayPal. The Motley Fool has positions in and recommends Meta Platforms, PayPal, and S&P Global. The Motley Fool recommends the following options: short December 2026 $62.50 calls on PayPal. The Motley Fool has a disclosure policy.
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