There are few companies in my portfolio where the gap between the market narrative and the underlying business interests me more than PayPal.
The prevailing view is fairly straightforward. PayPal was one of the great pandemic-era beneficiaries, the growth story faded, competition intensified, Braintree became increasingly commoditised, and the company has subsequently been left behind by the likes of Apple Pay, Stripe and Shopify.
The share price tells an extraordinary story. PayPal traded at more than $300 a share in 2021. Before the pandemic, it traded around $100. Today, following the collapse of the proposed Advent/Stripe transaction, the shares are around $50.
That decline is understandable to an extent. The market’s expectations for PayPal became excessive during the pandemic, and the company has not delivered the growth investors once expected.
But there is a problem with the more extreme version of the bearish narrative.
The financial statements don’t look like those of a collapsing business.
A much bigger business than it was in 2018
The simplest way to challenge the prevailing narrative is to go back to 2018, before COVID and before PayPal became a pandemic stock-market favourite.
The comparison is striking.
| 2018 | 2025 | |
|---|---|---|
| Revenue | $15.5bn | $33.2bn |
| Operating income | $2.2bn | $6.1bn |
| Net income | $2.1bn | $5.2bn |
| Total Payment Volume | $578bn | $1.79tn |
| Active accounts | 267m | 439m |
| Operating margin | 14.2% | 18.3% |
PayPal’s revenue has more than doubled. Operating income has nearly tripled. Net income has more than doubled. Payment volume has more than tripled, and the number of active accounts has increased substantially.
Even operating margins are higher than they were in 2018.
This isn’t what a business in structural collapse looks like.
There are certainly problems within those numbers, particularly around the quality of growth and the amount PayPal earns from each dollar of payment volume. But those are very different problems from the underlying franchise disappearing.
The problem is monetisation, not demand
This distinction is critical.
PayPal processed approximately $578bn of payment volume in 2018. By 2025, that had increased to around $1.79tn.
Yet revenue increased from $15.5bn to $33.2bn.
In other words, payment volume has grown considerably faster than revenue.
That tells us something important: PayPal is processing increasingly large amounts of lower-value or lower-margin payment volume.
Braintree is central to this issue.
Braintree allows merchants to use PayPal’s payment-processing infrastructure without necessarily presenting PayPal prominently to the consumer. It is an enormous business, but the economics are considerably less attractive than the branded PayPal checkout.
This has contributed to the market’s concern that PayPal is gradually becoming a commoditised payments processor.
That concern is legitimate.
But it is not the same as saying the business is collapsing.
In fact, PayPal’s transaction-margin dollars increased from approximately $13.7bn in 2023 to $15.5bn in 2025.
The company is still producing enormous amounts of economic value.
What does PayPal actually sell?
This is where I think the market narrative can become overly focused on the consumer wallet.
PayPal is not simply a company that provides consumers with a digital wallet.
It provides payment infrastructure to businesses.
A small online business can use PayPal to accept payments, send invoices, handle refunds, manage disputes, provide customers with a trusted payment option and access other financial services.
And importantly, a customer does not necessarily need a PayPal account to make a payment.
Depending on the merchant’s integration and the transaction, a customer can often use a credit or debit card through PayPal’s checkout as a guest.
That matters.
It means PayPal’s merchant proposition isn’t dependent entirely on having hundreds of millions of consumers actively maintaining PayPal accounts.
The merchant can integrate PayPal because it is a familiar and trusted payment provider, while the customer can simply use a card.
That creates a potentially valuable position in the middle of the transaction.
The small-business opportunity
This is also something that is easy to miss when looking at PayPal purely through the lens of large technology companies.
Independent merchants and entrepreneurs often don’t want to spend their time optimising payment infrastructure.
They want something that works.
When starting an online business, the decision can be remarkably simple:
How do I accept payments?
How do I give customers a payment method they recognise?
How do I handle refunds?
How do I deal with fraud and disputes?
How do I get paid?
For a small business, PayPal offers a relatively simple answer to many of these questions.
This is not an impenetrable moat. A merchant can switch payment providers, and competitors such as Stripe offer excellent products.
But there is still value in being a trusted, established payment partner.
Once a small business has integrated payment processing into its website, accounting, invoicing and customer processes, changing providers isn’t completely frictionless either.
That is a form of switching cost that doesn’t necessarily show up in a conventional analysis of PayPal’s competitive position.
The turnaround doesn’t need to be spectacular
This is perhaps the most interesting part of the investment case.
PayPal doesn’t need to return to being the 20%-plus growth company investors thought they were buying in 2020.
It doesn’t even necessarily need to regain its old valuation multiple.
The company generated approximately $6.4bn of operating cash flow in 2025 and around $5.6bn of free cash flow.
At a share price around $50–$55, the market is therefore placing a relatively modest valuation on a business that still produces billions of dollars of cash every year.
The opportunity is that management doesn’t necessarily need to create a revolutionary new business.
It could simply improve the economics of the enormous business that already exists.
PayPal processes roughly $2tn of payments annually.
At that scale, very small improvements in monetisation can become meaningful.
If PayPal can increase the economic value it captures from existing payment flows, improve its mix towards higher-margin products and continue reducing the share count through buybacks, the impact on per-share earnings could be substantial.
This is a much more modest proposition than assuming PayPal will suddenly return to its pandemic growth rate.
Look for better payment flows, not just more payment flows
This is where some of PayPal’s newer initiatives become interesting.
One example is its expansion into university tuition payments through integrations with Illumia, Nelnet Campus Commerce and TouchNet.
Those platforms serve more than 1,000 universities, giving PayPal access to a large and recurring payment category.
The important point isn’t that tuition payments will suddenly transform PayPal.
It is that tuition illustrates the type of opportunity management should be pursuing.
A university bill might be thousands or tens of thousands of dollars. The payment is recurring, unavoidable and relatively predictable.
PayPal doesn’t necessarily need to win another consumer’s coffee purchase.
It can potentially make more money by finding large, recurring payment flows and embedding itself into the infrastructure through which those payments are made.
There are numerous categories where the same principle could apply: rent, insurance, healthcare, education, government payments, business payouts and international transactions.
The objective should be better-quality payment volume, rather than simply more payment volume.
The valuation has changed dramatically
The biggest mistake would be to argue that PayPal should return to $300 simply because it once traded there.
That would be anchoring.
The company was dramatically overvalued at its peak, and investors were paying for years of exceptionally high future growth.
That growth didn’t materialise.
But the opposite mistake is to look at the collapse in the share price and assume the underlying business has suffered an equivalent collapse.
It hasn’t.
PayPal today is substantially larger than it was before COVID. It generates substantially more revenue and operating profit, processes more than three times as much payment volume and continues to generate billions of dollars of free cash flow.
The share price has fallen far more dramatically than those underlying metrics.
That doesn’t automatically make the shares cheap.
The market has legitimate concerns about competition, monetisation, Braintree and branded checkout.
But it does create an interesting question:
Has the market moved from correctly recognising that PayPal was overvalued to incorrectly assuming that PayPal is fundamentally broken?
That is the investment thesis worth investigating.
The bear case
There is a genuine bear case.
PayPal could continue losing share in branded checkout.
Apple Pay, Google Pay, Shopify and other competitors could continue taking the most attractive parts of the consumer payment relationship.
Braintree could continue growing faster than higher-margin branded transactions, reducing PayPal’s overall take rate.
Transaction-margin growth could remain weak.
And management could fail to find sufficiently attractive new payment opportunities.
If those things happen, today’s valuation may be entirely justified.
The fact that PayPal generates billions in free cash flow does not automatically mean that those cash flows are durable.
That is the question an investor ultimately has to answer.
But I think the market may be overreacting
For me, PayPal has become interesting precisely because it no longer needs to be viewed as a high-growth technology stock.
It can instead be viewed as a large, established payments company with hundreds of millions of customers, millions of merchants, enormous payment volumes and substantial free cash flow.
The turnaround doesn’t require perfection.
It requires management to make sensible decisions about where PayPal can earn attractive economics.
Improve monetisation.
Focus on higher-value payment flows.
Protect the branded checkout.
Make better use of Venmo.
Expand merchant services.
Develop advertising and other high-margin services.
Continue buying back shares when the valuation is depressed.
If management can do those things while the underlying payment ecosystem continues to grow, PayPal could generate attractive returns without ever returning to its previous growth trajectory.
That is why I am increasingly reluctant to describe PayPal as a failing business.
The stock has collapsed. The expectations have collapsed. The valuation has collapsed.
But the underlying business has not collapsed anywhere near as much.
And when there is a large gap between the narrative and the financial reality, that is usually where it becomes worth looking much more closely.