PayPal (PYPL -1.66%) stock has lost a third of its value since it hit a 52-week high back in July. Mixed reports in the second and third quarters, along with soft guidance for the current period, sparked concerns about its goal of more than doubling annual revenue by 2025.

Other factors -- including PayPal's rumored deal negotiations with Pinterest, a Department of Justice probe of the company's relationship with Visa, and an inflation-fueled sell-off in tech stocks -- exacerbated the situation.

But have investors overreacted to PayPal's near-term challenges? Let's review three reasons to buy PayPal -- as well as one reason to sell it -- to decide.

Outside view of PayPal's office.

Image source: PayPal.

1. PayPal's user base continues to grow

PayPal ended the third quarter with 416 million active accounts, and its total payment volume (TPV) hit $310 billion. Those core metrics, along with its total revenue, have consistently grown by double digits year over year:

Growth (YOY)

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Active accounts


















Data source: PayPal. As reported on a currency-neutral basis. YOY = year-over-year.

PayPal expects to end the current quarter with more than 430 million active accounts, which would represent at least 14% year-over-year growth.

During the earnings call, CEO Dan Schulman said PayPal still remained "quite confident" in its goal of hitting 750 million active accounts in 2025. That target, which supports another goal of generating more than $50 billion of revenue by that same year, implies its active accounts will increase at a compound annual rate (CAGR) of nearly 15% over the next four years.

That expansion relies on the ability of PayPal's new "super app" -- which bundles together a digital wallet, a savings account, peer-to-peer payments, bill payments, direct deposits, cryptocurrency services, BNPL (buy now, pay later) services, and other offerings -- to lock in its users, widen its moat against rivals like Square, and reduce its churn rates.

2. Its new partnership with Amazon

Over most of the past three years, PayPal's revenue growth was throttled by its loss of eBay to Adyen.

However, PayPal has continued growing on its own, and it recently signed a new partnership with Amazon, which will enable the e-commerce giant to start accepting Venmo payments in 2022.

Venmo is already a peer-to-peer payments leader with over 80 million customers, but it's facing tough competition from Square's Cash App, which surpassed 70 million annual active users earlier this year. Partnering with Amazon will generate fresh tailwinds for Venmo and help the service maintain its narrow lead.

3. Its stock is reasonably valued

The past four months have been rough for PayPal investors, but the sell-off has reduced the stock's valuation to more reasonable levels.

As of this writing, PayPal trades at 39 times forward earnings, eight times next year's sales, and less than five times its 2025 revenue target of $50 billion. It's not undervalued, but it looks more attractive (especially relative to its profits) than many of its fintech peers.

By comparison, Square -- which generates more volatile returns due to its heavy dependence on Bitcoin revenue -- trades at 122 times forward earnings and just over five times next year's sales. Adyen trades at 122 times forward earnings and 57 times next year's sales.

The one reason to sell PayPal: margins

A lot of investors are fixated on PayPal's active account and revenue goals for 2025, but they might be paying less attention to its goal of increasing earnings at a CAGR of 22% from 2020 to 2025.

It expects to achieve that growth rate by expanding its operating margin and consistently repurchasing shares.

However, PayPal has been gradually buying more companies -- including Honey in 2020 and Paidy this year -- to expand its ecosystem and gain more users. Meanwhile, its adjusted operating margin has gradually declined over the past year as its top-line growth decelerates:


Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Adjusted operating margin






Data source: PayPal.

During the latest earnings call, CFO John Rainey said the company's operating margin is contracting, because it continues "to invest aggressively in technology and development and sales and marketing, including increased spending on customer acquisition and engagement strategies."

That ongoing compression, along with PayPal's ambitious earnings growth targets, could cause some surprising earnings misses in the future.

Do the strengths outweigh the weaknesses?

PayPal's core business is still strong, but it may have set the bar too high for itself. As a result, its stock got a bit overheated, but it has cooled off enough to consider buying again.

The company will likely remain one of the world's largest digital payment platforms for the foreseeable future, and its ecosystem will continue to expand as people move away from cash. It faces some near-term headwinds and tough year-over-year comparisons from the pandemic, but it's still a sound long-term investment which offers a great balance of value and growth.