PayPal – Mispriced, Misunderstood, and Stronger Than Ever (Q3 Review)
Q3 results once again highlight improving fundamentals, accelerating growth, and a strategy that’s clearly taking hold. Meanwhile, Wall Street remains anchored to an outdated narrative.
Since May of this year, I have become increasingly bullish on PayPal, which is why I have been building a sizeable position in the company on weakness over the last 6 months, making it a top 10 position in my own portfolio at an average cost $65.
The thesis is straightforward. Wall Street is writing off PayPal as a pandemic-era relic and a losing legacy player in the highly competitive Fintech sector, poised for disruption, and pricing it accordingly.
Yet, the fundamentals tell a different story from the narrative that seems to dominate. This is still one of the largest and most trusted payment platforms in the world, with a highly scalable dual-sided network that remains deeply embedded across global commerce. More than 400 million users and millions of merchants continue to rely on PayPal and Venmo every single day. That level of reach and habit is not easily replaced.
Furthermore, despite persistent bearish narratives, the core strengths that once made PayPal a leader remain firmly intact: a widely recognized brand, strong trust across merchants and consumers, robust engagement trends, and exceptional cash generation.
What has changed, however, is the strategy. Under Alex Chriss, PayPal is making deliberate moves to reposition itself for stronger long-term competitiveness. This includes reinvigorating branded checkout, accelerating Venmo monetization, expanding omnichannel functionality so that PayPal remains relevant no matter where or how consumers shop, and becoming a broader commerce platform rather than just a behind-the-scenes processor.
The early signs of success are already visible: renewed user growth, rising engagement, improving take rates, accelerating branded TPV growth, and healthier margins. The business is starting to benefit from improved product experiences, higher checkout conversion rates, deeper merchant integration, and a broader suite of services that reinforce ecosystem stickiness.
Additionally, PayPal continues to generate billions in free cash flow annually, maintains a fortress-like balance sheet, and remains structurally positioned to ride long-term tailwinds such as growing e-commerce, cross-border transactions, and embedded financial services.
Yet the market refuses to acknowledge that progress. Despite clear indicators that the strategic realignment is working, sentiment remains anchored to the past: fears over competition, misconceptions about platform health, and a narrative of irreversible decline. That skepticism has left the stock significantly de-rated, even as the fundamentals and execution have steadily strengthened – eventually, fundamentals win the argument.
I see a mispriced franchise with durable economics, renewed strategic discipline, and one of the widest moats in fintech trading at a valuation typically reserved for sunset industries. That mismatch creates opportunity.
So, with that thesis in mind, it’s time to turn to the company’s Q3 results announced earlier this week, which only further strengthened my thesis and conviction – PayPal delivered improved numbers on almost every metric and did all of this while delivering over $2 billion in FCF at a 27%+ FCF margin – even as investors gave it little credit.
While PayPal shares initially gained 16% in last Tuesday’s pre-market, the company ended the day up just 4% and lost all of that gain in yesterday’s trading session, leaving shares practically flat, despite also announcing its first-ever dividend and a compelling strategic partnership with OpenAI to integrate payments into ChatGPT.
In the remainder of today’s analysis, I want to go over the PayPal Q3 results and management’s strategic progress, putting the numbers into perspective and reviewing performance, before making up the balance, updating my thesis, financial estimates, and target price!
Is PayPal really still worth just 13x earnings and a PEG below 1, given expectations of high-single-digit revenue growth and mid-teens EPS growth?
Let’s delve in!
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PayPal’s Q3 Review
PayPal released its Q3 results last Tuesday, which beat on most metrics. PayPal delivered a top- and bottom-line beat, TPV and revenue growth accelerated by two percentage points, margins expanded, and cash flows were excellent.
Yet, more importantly, underlying operating numbers signaled substantial strategic progress, which deepens my conviction and confidence in PayPal’s strategic focus under Alex Chriss and, subsequently, its long-term outlook.
Let’s get right to the numbers, starting at the top!
PayPal reported total payment volume growth of 8% to over $458 billion, which is excellent and accelerated further from prior quarters. Clearly, PayPal is gaining momentum again, with the peak of its shedding of unprofitable volumes behind it and strategic initiatives clearly paying off, leading to improved engagement and continued user growth.
Let’s be honest, accelerating and growing volumes by 8% at this size in a scrappy macro environment and still very much in the early stages of a strategic shift away from an online checkout platform to a full commerce platform deserves credit.
Put simply, PayPal is delivering, and its payment volume is a great measure.
Key to this acceleration is deepening user engagement and growth. First of all, PayPal delivered another quarter of user growth, though I have to admit it was lighter than I had hoped. I had counted on this number to remain at least stable at 2%, ideally accelerate to 3% to confirm that PayPal is gaining traction, so this 1% growth is somewhat disappointing.
Yet, I am also glad to see PayPal’s user base continue to grow, reaching another all-time high. Ultimately, as long as PayPal continues to gain millions of users at its already massive scale, this is anything but a dying platform.
Much more positively, engagement numbers did come in really strong. PayPal saw its number of monthly active accounts outgrow total user growth at 2% (to 227 million), and transactions per account (the best proxy for engagement) grew by 7% YoY (excluding PSP), indicating that users are using the PayPal platform more regularly and for more purchases, supported by its renewed strategic focus, as I will point out later.
These numbers also reflect a higher checkout rate across all channels, driven by a redesigned paysheet and new authentication efforts, all designed to improve the checkout experience. Combined, PayPal has already seen checkout conversion rates improve by 2-5 percentage points, benefiting both consumers and merchants.
Breaking volumes down further, the biggest focus should be on branded experiences, which represent its highest-value volumes and most significant long-term opportunity. For reference, these refer to payment transactions in which the customer visibly interacts with the PayPal brand at checkout, whether online, in-app, or in-store.
In Q3, branded TPV (including online checkout, PayPal, and Venmo debit as well as Tap to Pay) grew 8% YoY (FX-neutral), driven primarily by its omnichannel initiatives. Furthermore, U.S.-branded volumes grew 10% YoY, accelerating from prior quarters and doubling YoY.
A central part of PayPal’s strategic shift under CEO Alex Chriss is its move to become a commerce platform instead of a simple online payments processor, with availability everywhere, not just online but also in-store or even agentic. As a result, PayPal is rapidly expanding its branded experiences from simple online checkout to BNPL, Venmo, Crypto, debit cards, and Tap to Pay.
This means PayPal is massively expanding its TAM, “moving beyond retail into services, subscriptions, bills, everyday expenses and more,” to quote management.
Starting with branded checkout – its legacy online business – volumes grew 5% YoY in Q3, which is really decent amid choppy macro trends. At the same time, 5% growth in this highly competitive environment does signal market share losses, so PayPal does need to do more in its legacy online checkout business. While PayPal saw improved volumes in Asia-based marketplaces, pockets of softer consumer discretionary spending in Europe and the U.S. dragged on the performance.
While checkout transactions were mostly stable, order value has declined, a trend that has persisted so far in Q4.
Positively, growth elsewhere in the branded experiences business was exceptional, with PayPal’s new strategy gaining momentum. Take PayPal’s debit card and Tap to Pay business, which, while still small within the entire business, is becoming an increasingly important growth driver, with volumes growing 65% in Q3, accelerating from Q2.
Momentum is improving here, and PayPal is seeing an increasing share of users using PayPal across different channels. Crucially, this leads to far greater ARPA, with payment frequency growing rapidly. For reference, PayPal already sees that PayPal debit card users transacted 6x more using PayPal, generating 3x greater ARPA.
This remains a massive opportunity for PayPal, and I love its strategic focus.
Moving to buy now, pay later (BNPL), PayPal continues to deliver stellar numbers here, fully benefitting from its best-in-class global availability – the reach it has built up over decades is hard to replicate for up-and-coming BNPL providers.
The numbers speak for themselves: PayPal saw monthly active BNPL accounts grow 21% YoY, delivered 20%+ revenue growth in Q3, and is now on track to deliver a BNPL TPV of $40 billion in 2025. By current estimates, PayPal continues to far outgrow the BNPL industry, which is expected to grow by 13% YoY in 2025 to $560 billion in volumes. This suggests PayPal now captures 7% of the market, and that market share is growing rapidly.
BNPL remains a massive opportunity in its own right. Suppose PayPal grows its market share to 15% by 2029, which is well within reach; that would suggest roughly $135 billion in volume, reflecting a potential 37% CAGR. Massive!
Finally, regarding branded experiences, let’s address Venmo, another PayPal growth engine and long-term opportunity, attracting a young, affluent, digitally native consumer. In Q3, Venmo TPV growth accelerated by two percentage points compared to Q2 to 14%, marking the fourth consecutive quarter of double-digit growth. Meanwhile, Venmo is now close to hitting 100 million total active accounts, and continues to grow at a mid-single-digit rate.
Furthermore, Pay with Venmo hit a $1 billion TPV milestone, Pay with Venmo active accounts grew 25% YoY, and Venmo debit card users crossed 1 million.
As a result, Venmo is poised to generate $1.7 billion in revenue in 2025, suggesting 20%+ growth, double that of two years ago, pre-Alex Chriss. During its investor day, PayPal guided for over $2 billion in revenue by 2027, and it seems well on track to exceed that, especially given the monetization opportunities ahead.
On that note, let’s get to PSP volumes, which refer to the payment processing volumes that flow through PayPal’s unbranded processing platform, primarily Braintree.
While this part of the business remains somewhat of a drag, we can see significant improvement. In recent years, in a push to become more efficient and focus on higher-margin volumes, PayPal has been removing some unprofitable volumes at the cost of near-term performance, which led to PSP volume growth dropping toward or just below zero from Q4 2024 through Q2 2025.
Positively, the through here is now behind it, allowing volume growth to recover, and doing so with much better profitability. In Q3, growth recovered to 6%, up from 2% in Q2, and it finally positively contributed to gross margin dollars. We should see ongoing improvement in the coming quarters, both in terms of volumes and profitability.
Ultimately, these improved volumes drove transaction revenue growth of 7% to $7.5 billion, reflecting a slightly lower transaction take rate of 1.64%, down three basis points, driven by product and merchant mix as well as the impact of foreign exchange hedges. However, I am pleased to see this stabilize a bit more.
Other value-added services revenue added another $895 million, up 15% YoY, driven by another quarter of strong performance in consumer and merchant credit, where higher consumer balances offset lower interest rates.
In total, PayPal’s revenue take rate fell two bps to 1.84%. Ultimately, this led to a Q3 revenue of $8.4 billion, up 7% YoY and beating consensus estimates by $170 million. This also shows a two percentage point acceleration from Q2 and a very positive trend, as we can see a growth inflection from here.
As a shareholder, I am very pleased with these reported top-line results and operational numbers.
Moving to the bottom line, PayPal also managed to surpass estimates, delivering results that came in at or above the high end of guidance.
TM (transaction margin) dollars (excluding interest on customer balances) hit $3.9 billion, up 6% YoY, driven by multiple areas of the business, including branded experiences, PSP, and Venmo. PayPal is now on pace to deliver 6-7% growth in 2025, still accelerating despite a 150 bps headwind from higher volume-based expenses, which is excellent strategic progress and a reflection of PayPal’s strategic initiatives.
Further down the line, PayPal reported non-transaction-related operating expenses up 7% YoY, growing roughly in line with revenue, allowing for operating income growth of 6% YoY to $1.6 billion. This reflects an operating margin of 18.6%, down 20 bps YoY.
Q3 non-GAAP EPS was 1.34, up 12%, driven by a lower share count following significant repurchases. This beat the consensus by a very solid $0.14.
Finally, adj. FCF in Q3 was a very strong $2.3 billion, up 48% YoY and reflecting an impressive 27% FCF margin, as PayPal remains a FCF machine. YTD FCF now sits at $4.3 billion and should hit $6-7 billion in 2025.
This allowed PayPal to keep strengthening its balance sheet, now holding $14.4 billion in cash and equivalents against $11.4 billion in debt, leaving it in a healthy net cash position with loads of liquidity.
Thanks to these strong cash flows and its healthy balance sheet, PayPal remains committed to returning cash to shareholders, targeting 70% to 80% of FCF. In recent years, PayPal returned cash solely through buybacks to maintain capital flexibility. In Q3 alone, it bought back $1.5 billion of shares, which FCF fully covered, bringing its total in the TTM to $5.7 billion. From current prices, this reflects an almost 9% decrease in share count in just 12 months, which is remarkable.
However, PayPal is taking this to the next level by initiating a dividend on top of these buybacks starting this current quarter. With business momentum strong, cash flows as healthy as ever, and a mighty balance sheet, PayPal feels it has enough room to fund this quarterly commitment, designed to complement its existing buyback program.
Based on a $0.14 quarterly payout, PayPal shares now yield 0.8% at a very conservative 10% payout ratio. As for now, this won’t impact its buyback plans either, working in conjunction, which shouldn’t be a problem, as FCF should comfortably cover both expenses on an annual basis.
In my view, this is brilliant for shareholders. This makes PayPal one of the most exciting dividend growth investments, with a strong starting yield, a low payout ratio, and excellent growth potential – taking shareholder returns to the next level. Additionally, it signals confidence. Management feels comfortable committing to these quarterly costs, given its financial strength and business momentum.
Honestly, I really liked this quarterly report!
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Outlook & Valuation
Following an excellent Q3 report, PayPal management also remained bullish on Q4 and FY25, lifting its bottom-line guidance.
PayPal now guides Q4 FX-neutral revenue growth in the mid-single digits, with TM dollars between $4.02 billion and $4.12 billion, representing about 3.5% growth at the midpoint or 5% growth when excluding interest on customer balances. Meanwhile, OpEx should grow by low single digits, which should allow for EPS in the range of $1.27 and $1.31, suggesting 7% to 10% growth, but the midpoint falls short of a $1.31 consensus.
For FY25, this translates into slightly higher TM dollar guidance likely to come in at the high-end of the $15.45 billion to $15.55 billion guided range, representing YoY growth of 5-6% or 6-7% when excluding interest. Additionally, managed raised its EPS guidance to a range of $5.35 to $5.39, suggesting YoY growth of 15-16% and with a midpoint well ahead of the pre-earnings $5.24 consensus. Finally, FCF should be around $6-7 billion.
On top of this guidance, management also indicated that recent trends mean it remains confident in its long-term growth targets, still targeting high-single-digit transaction-margin dollar growth and EPS in the mid-teens or better, which is extremely bullish, though definitely not far-fetched.
As for my own projections, I feel comfortable lifting my FY25 estimates, now projecting revenue growth of just over 5%, up about one percentage point from before, and EPS growth of 15.4%, with an EPS at the midpoint of guidance. Clearly, PayPal is seeing good momentum in its business, and while this might stagnate a bit in Q4 and into 2026 due to a scrappy macro and tougher comparables, I still expect healthy growth.
Looking ahead to 2026 and beyond, I expect growth to accelerate further in 2026 and 2027, then stabilize in the high single digits, given PayPal’s large base. Within this, I expect user growth to remain stable in the 1-2% range and engagement to keep growing, thanks to greater availability and its commerce strategy working out. I believe PayPal has plenty of levers to pull to fuel this kind of growth through 2030.
Meanwhile, I expect margins to recover strongly in the 2026-2028 period, driven by improved operating leverage from accelerating growth and slower cost growth after an elevated cost cycle in recent years. This should lead to an improvement in gross and operating margins. Combined with continued buybacks, I expect PayPal to keep delivering low-to-mid teens EPS growth, which might very well turn out slightly conservative.
These assumptions are reflected below!
“PayPal is a fundamentally stronger company today than it was 2 years ago.”
This quote from Alex Chriss is key, and the numbers back it up. Yet, investors still give it zero credit.
While shares gained 15% initially on Tuesday, they ended yesterday’s trading session at practically their pre-earnings price, despite PayPal delivering a strong Q3 report, showing substantial operational progress and initiating a dividend. Subsequently, both Wall Street and myself raised financial estimates through 2028.
PayPal shares now trade at just under $70 per share, and from that price, we are looking at a 13x earnings multiple based on this year’s profit, and an 11.6x multiple based on next year’s profit. Considering current growth projections, this translates into a PEG of below 1x, suggesting PayPal has entered bargain territory once more, with current multiples still not acknowledging this growth outlook. Finally, this indicates a 10x 2025 FCF multiple, which is just ridiculous.
In other words, yes, I deem PayPal shares criminally undervalued.
This isn’t a dying business; it’s the undisputed industry leader, showing improving numbers across the board, yet it is priced nothing like it. PayPal is in excellent financial health, generates heaps of FCF, and is expected to deliver EPS growth at a 14% CAGR through at least 2028.
Suppose we assume an 18x exit 2027 exit multiple, which I believe this business is worth comfortably (with room for upside), I calculate an end-of-2027 target price of $124. At the current share price of $70, this suggests an annualized return of 29% over the next 2+ years, which is incredible – I can comfortably see PayPal shares double in value in just two years.
At these prices, PayPal is absolutely a no-brainer, with an exceptional risk-reward profile and the potential for 2x market returns. It is time to buy more.
Rating: Strong Buy - Accumulate below $90
FY27 Target Price: $124
Implied CAGR from the current price: ~29%
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Hey, great read as always. I entirely concur with your assesment of PayPal's fundamental strength and strategic direction. Do you anticipate significant traction for their new omnichannel approach in the coming quarters?