PayPal Holdings (PYPL -1.48%) has fallen far from its pandemic-era highs, with its stock trading at an unusually low price. With the business slowly stabilizing and generating plenty of cash, investors may be wondering whether the stock has become a legitimate bargain. That question starts with understanding why the market soured on PayPal in the first place.
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Why PayPal's stock has fallen out of favor
The market has become much less willing to pay a premium for PayPal even though the company still has enormous scale across digital payments, Venmo, Braintree, and its huge merchant ecosystem.
But competition has intensified, particularly in online checkout, where Apple Pay and Shopify's Shop Pay have gained ground. PayPal's branded checkout business has been one of the biggest concerns around the stock.
NASDAQ: PYPL
Key Data Points
That explains why the valuation has fallen so dramatically. PayPal's forward price-to-earnings (P/E) ratio is nearly 10 times, compared with a much higher multiple of almost 15 times for the broader financial industry. In other words, the market isn't overlooking PayPal's problems. A large part of the discount reflects concerns about growth and competition. But recent trends suggest that the story is starting to change.
PayPal's second-quarter results showed signs that the turnaround is progressing. Revenue increased 5% year over year, while total payment volume rose 10%. Venmo and Braintree helped drive that growth, and management raised its full-year earnings outlook.
More importantly for a value investor, PayPal is still generating significant cash flow as it restructures the business, with both operating and free cash flow improving sharply during the first half of the year.
Although PayPal may not be growing as fast as it once did, much of the bull case depends on an improving core business and strong cash generation. That kind of steady execution starts with the leadership steering the turnaround.
How PayPal's new CEO plans to turn things around
Chief Executive Officer Enrique Lores took over in March and has been pushing PayPal to focus more on consumer growth, Venmo, and Buy Now, Pay Later (BNPL), while also modernizing its advertising and technology. Management also laid out a multi-year cost-saving program through 2029.
That matters because PayPal doesn't necessarily need explosive growth to create a better investment story. If management can keep the core payments business growing modestly while improving margins, the market could view PayPal much differently.
But at the same time, PayPal isn't waiting for growth to come to it. Instead, it's exploring some interesting new avenues for growth. For example, the company is expanding PayPal and Venmo across education payments, BNPL, and other merchant services. Meanwhile, PayPal World is also designed to connect PayPal with other digital wallets.
On top of that, management is investing in advertising and artificial intelligence (AI)-powered commerce. For example, PayPal recently integrated Meta's Muse AI shopping assistant. That could be a meaningful move, especially as agentic commerce gains more traction. PayPal is building tools that let merchants make their products discoverable through AI assistants, helping shoppers move from browsing to checkout more seamlessly.
These initiatives are still early on, so they shouldn't be treated as proven growth engines. But they do give PayPal more ways to drive growth while turning around its core business. That combination, a stabilizing core plus new growth levers, brings the conversation back to the central question.
What needs to go right for the bull case
PayPal certainly looks like a deep value stock right now. The bull case depends on several things going right: It must keep transaction volume growing, become more competitive in checkout, monetize Venmo and Braintree more effectively, and cut costs to improve margins.
Looking at its valuation, the market is uncertain. But, if the business can stabilize rather than deliver the same high growth rates it once did, today's valuation could look more like a bargain.
