Profitability Beats Growth: The Quiet Comeback Of PayPal Stock
One of the overweight core holdings in my portfolio is PayPal. Here is an overview of the excellent progress of the turnaround in the first quarter of 2025.
One of my core investments since 2024 has been PayPal stock ( PYPL 0.00%↑ ). You can read the investment case here. The focus is on a new, innovative management team that will get the company back on track after years of mismanagement and will make it more efficient and competitive.
PayPal released its first quarter results on April 29th, 2025. Despite low revenue growth, the company was able to significantly increase profitability and advance key strategic initiatives. However, this did not boost the share price in the short term.
Here is a quick recap of the quarter:
PayPal's Q1 2025 Financial Highlights
In Q1 2025, PayPal generated revenue of $7.8 billion, up just +1% year-over-year. Adjusted earnings per share (non-GAAP EPS) increased 23% to $1.33, well ahead of analyst expectations of $1.16. GAAP EPS was $1.29, up a full +56% over the prior year.
GAAP operating income grew 31% to $1.5 billion and the operating margin expanded to 19.6%. Non-GAAP operating margin improved to 20.7%.
Efficiency Improvements at PayPal
Under the leadership of the new CEO Alex Chriss, who took over the company just five quarters ago, PayPal is increasingly focusing on high-margin businesses and efficiency improvements. Operating costs were reduced by 4% year-over-year through the use of more automation and artificial intelligence. These successes on the cost side led to a significant improvement in profitability despite low revenue growth.
Transaction margin dollars, a key indicator of profitability, increased +7% to $3.7 billion. This metric shows how much gross revenue PayPal generates from payment transactions - i.e., after deducting direct transaction costs such as fees to card networks (e.g., Visa, Mastercard) or other payment infrastructures (e.g., Stripe) - and how much PayPal actually earns from transactions before general operating expenses (R&D, Sales+Marketing, G&A) are incurred.
At the same time, total transaction volume (TPV) has only increased by 3%. This means that PayPal has become more efficient at generating more profit from each dollar of payment volume.
PayPal User Growth And Payment Volume
The number of active accounts grew by +2% to 436 million compared to the prior year. Total payment volume (TPV) was up +3% to $417.2 billion. However, the total number of payment transactions declined by -7%, primarily due to a decline in unbranded PSP transactions. Excluding this effect, transactions increased by +6%, indicating stable development in the core business.
"Unbranded PSP transactions" in the context of PayPal refer to payment transactions in which PayPal acts as a payment service provider (PSP) in the background, without the end customer actively perceiving or using the "PayPal" or "Venmo" brand. These transactions take place without any visible PayPal branding, such as third-party payment transactions where PayPal only handles the technical processing. For example, PayPal acts through its subsidiary Braintree, this is a PSP solution acquired by PayPal that acts as a white label.
Some of these unbranded PSP transactions have not been profitable for PayPal in the past. PayPal's new management team has decided to change (or terminate) such unprofitable contractual relationships, which will dampen revenue growth even in the coming quarters but increase profitability.
Challenges In Branded Checkout
Analysts are much more concerned about the relatively slow growth of branded checkout, the core business of PayPal and Venmo, compared to the rest of the industry. Increasing competition from tech giants Apple and Google is putting pressure on the company. PayPal plans to increase growth in this area to 8-10% by 2027, in part through new innovative features (such as Fastlane) and better monetization of Venmo. In the first quarter, branded checkout payment volume grew +6%.
Share Buybacks And Outlook
In the first quarter, PayPal generated $1.0 billion in free cash flow and repurchased approximately 19 million shares for $1.5 billion. PayPal plans to repurchase $6 billion of PayPal shares through 2025, which represents approximately 9% of all outstanding shares at current prices!
Despite a better-than-expected start to the year and a similarly good April 2025, PayPal has not yet raised its previous full-year guidance, with adjusted earnings per share expected to be between $4.95 and $5.10. This cautious stance is justified by uncertainties in the global macroeconomic environment, namely the erratic trade policies of the US president.
Competitive Landscape
PayPal has always faced intense competition from other payment providers and technology giants. Apple Pay and Google Pay are gaining market share in mobile payments. PayPal also competes with companies like Square (Block Inc.), Stripe, and traditional financial institutions that are expanding their digital offerings. To stay competitive, PayPal is now (finally) investing in new technology, partnerships, and better integration of its offerings under new management.
The introduction of features like Fastlane and improved monetization of Venmo are part of this strategy. In addition, the company, like many others, is working to integrate AI-based capabilities to create personalized user experiences.
PayPal Stock Valuation vs The Competition
PayPal shares were last trading at around $67, down -23% since the beginning of the year. The price-to-earnings (P/E) ratio, based on current 2025 earnings estimates, is around 13, which looks cheap compared to competitors like Block Inc. and Adyen.
However, for me personally, the cash flow multiple is much more important than the P/E ratio. Looking at the enterprise value to free cash flow (EV/FCF) ratio PayPal is currently very attractively valued with an EV/FCF of 11 compared to Adyen and Block.
In addition, unlike its competitors, PayPal's outstanding shares will likely continue to decline significantly due to its large share repurchase program, further increasing future cash flow per share.
I consider the current valuation of PayPal stock to be an opportunity for long-term investors, especially if PayPal successfully executes its strategic initiatives and accelerates growth in the branded checkout segment as planned by 2027. Of course, the looming US recession under Trump is a big unknown and a risk that should not be underestimated.
Conclusion
PayPal delivered solid results in the first quarter of 2025 and successfully advanced its key strategic initiatives. Despite well-known competitive challenges and only modest revenue growth, the company significantly increased profitability. I believe PayPal's stock valuation is attractive relative to its competitors and also on a historical basis, and it remains a core investment in my portfolio.
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*Disclaimer: The author and/or related persons or entities own shares of PayPal. This article is an expression of opinion and does not constitute investment advice.