PayPal (PYPL +0.63%) has been trying to turn around its business for years, but its new partnership with Alphabet (GOOGL +2.12%) (GOOG +2.22%) has the potential to be a game-changer. With this partnership, it will change now be at the forefront of artificial intelligence (AI)-powered commerce.
As part of the deal, PayPal will become the primary payments processor across Google Cloud, Google Ads, and Google Play. Its branded checkout and payment services will also be incorporated throughout Google's broader ecosystem. But that's not all. PayPal will also migrate its entire technology stack to Alphabet's cloud computing platform, Google Cloud. That lets it ditch some of its legacy infrastructure and lean on Google's machine learning to help boost things like fraud detection and speed up transaction processing.
The two companies are also teaming up to create what they are calling "agentic commerce." This is where AI shopping agents will be able to help consumers not only make purchases, but also discover new products and comparison shop. The companies will also help develop AI agent standards and best practices. This is where e-commerce appears to be heading, and PayPal has positioned itself well for this future by teaming with Alphabet.
The partnership should also help PayPal expand its reach at a relatively low incremental cost. Integrating its payment platform across Google products brings it access to billions of users and millions of merchants without PayPal having to spend heavily on customer acquisition.
Image source: Getty Images.
In the past, CEO Alex Chriss has talked about not chasing low gross margin volume for the sake of revenue growth. Now, the economics of payment processing for a client as large as Google isn't going to be robust, but the sheer size of that volume and the technological partnership more than make this deal worthwhile. Meanwhile, moving more of PayPal's workload to Google Cloud should help it launch new features faster.
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While there is still plenty of heavy lifting for PayPal to do, this deal should help the company achieve its goal of accelerating its branded checkout growth from the mid-single digits to between 8% to 10% by 2027, as its branded checkout is expanded to key Google properties.
Investors also should not underestimate the strategic importance of the partnership. For years, PayPal has faced criticism that it was stuck as just a digital wallet with little differentiation. Now it is embedding itself in one of the most influential tech ecosystems while also collaborating on the very protocols that will shape how AI shopping agents transact. That's a very different positioning than being yet another online checkout button.
It's also worth noting that PayPal continues to execute on other fronts. Venmo revenue grew more than 20% last quarter, and Pay with Venmo transactions were up 45%. Physical debit and credit cards are also gaining traction, with 2 million first-time PayPal and Venmo debit card users added in the U.S. in Q2. Transaction volume from those offline channels rose 8%. These aren't headline-grabbing innovations, but they show the company is broadening its user base and strengthening ties with consumers.
The stock has been a laggard, down roughly 20% year to date, even after posting strong earnings last quarter and raising its full-year EPS outlook. That has left PayPal at an attractive valuation, trading at a forward price-to-earnings ratio (P/E) of about 11.5 times 2026 analyst estimates.
There is a risk that the market won't immediately reward the partnership, since most of the financial benefit will take time to materialize, but for investors willing to be patient, this looks like the kind of strategic move that can reinvigorate growth and help close the gap between PayPal's valuation and its potential. AI-driven commerce is still in its early innings, and PayPal is now much better positioned than it was just a couple of months ago.
