PayPal (PYPL 2.61%) has not given investors much of a reason to be optimistic. The market hasn't been happy with the drastic slowdown following surging growth during the pandemic, which is understandable. But shares continue to march lower.
Investors weren't pleased with the latest financial results. And the board of directors has decided to fire CEO Alex Chriss and bring in HP boss Enrique Lores, who will start on March 1.
This beaten-down fintech stock is trading 86% below its peak (as of Feb. 3). And the forward price-to-earnings ratio of 9.2 would pique the interest of value investors.
Is PayPal an underrated investment play right now?
Image source: PayPal.
Focus on discretionary spending
"Branded checkout represents over half our profit dollars," Chief Investor Relations Officer Steve Winoker said on the Q4 2025 earnings call. Softness in this category can hurt the business, which is what happened.
During the fourth quarter (ended Dec. 31), online branded checkout saw a 1% rise in total payment volume compared to Q4 2024, not an encouraging sign during the holiday season. Engagement is also falling, as transactions per active account fell 5% in Q4.
Management called out retail weakness here in the U.S. as a key headwind. It also doesn't help that competition is intense, from the likes of tech giants like Apple Pay and Alphabet's Google Pay, popular digital wallets that control distribution via integration with smartphones.
This highlights the unique position PayPal has in the payments landscape, focusing heavily on discretionary and online spending, as well as a middle-income demographic, which didn't work to its favor in the fourth quarter. The contrasts with Visa and Mastercard, massive payment networks that both posted double-digit year-over-year revenue growth, and whose leadership teams called out healthy consumer spending and macro conditions. PayPal is proving that the activity on its platform is more sensitive to economic factors, introducing cyclicality.
NASDAQ: PYPL
Key Data Points
Dividend head-scratcher
Investors are forward-looking. So it makes sense that management's "low-single digit decline to slightly positive" guidance for adjusted earnings per share in 2026 wasn't well received. Hiring a new CEO after less than three years also doesn't instill confidence among shareholders.
In light of these negative developments, the company just paid its first ever quarterly dividend of $0.14 in December. The total payout was $130 million in the fourth quarter. While PayPal is profitable and generates positive free cash flow, this could be viewed as a head-scratching capital allocation decision. This money could be directed to boost marketing spending by 19% or product development expenditures by 16% (based on the Q4 income statement), which should be the top priority.
PayPal's stock is trading at a dirt cheap valuation. However, this clearly isn't an underrated investment play. Investors should demand fundamental improvements before taking a chance on the business.
