PayPal

Bloomberg has reported that Stripe and Advent are no longer in talks to buy PayPal. In reaction to this news, PayPal's shares were down 11% in trading on Aug. 28.

Why it matters: Stripe and Advent had reportedly offered to buy PayPal at a price of $60.50 per share. This offer was considered too low by PayPal's management, according to reports, and we would agree with this view. There had been speculation that the companies were haggling over the price, but it appears they could not come to a mutually agreeable figure.

The bottom line: We will maintain our $80 per share fair value estimate for the narrow-moat company, which is based on its stand-alone value, and see PayPal's shares as undervalued. While we appreciate the headwinds that the company faces, we think PayPal can generate modest growth and stable margins over the long run and that the current market price implies an overly pessimistic long-term view. While it is still very early, we think results under new CEO Enrique Lores have so far been largely positive, which inspires some confidence in his ability to affect a turnaround.

Our fair value estimate for PayPal is $80 per share, which equates to 14.9 times our projected 2026 adjusted earnings per share estimate.

Growth started slowing in 2022 as the company faced some headwinds, and management has faced diffciulties reigniting growth. Going forward, we expect top-line growth to come under more pressure in 2026, as management attempts to reset the business, and macroeconomic issues could potentially create additional issues. However, we think PayPal can maintain revenue growth at a mid-single-digit level as it rides the secular shift toward electronic payments generally and e-commerce and mobile payments more specifically. Our projections result in a 5% revenue compound annual growth rate over the next five years, with growth picking up modestly in the back half of our projection period.

Margins came under pressure due to the loss of the high-margin eBay relationship, but management more than offset this with sizable cost reductions over the past couple of years. However, margins will again be pressured in 2026, as management increases investments for growth. We expect margins (adjusted to exclude amortization and one-time expenses) to decline materially in 2026, but thereafter to improve modestly as the company finds a stable base and returns to modest growth. The net effect is adjusted margins at the end of our projection period are 18%, about 2 percentage points below the 2025 level.

We use a cost of equity of 9.6% and a weighted-average cost of capital of 8.8% in our valuation.

Payment processing of any type is highly scalable, as once a payment platform is established, there is little incremental cost per transaction. If viewed through the lens of the acquiring industry, PayPal has material scale with over $1.8 trillion in annual volume, but falls short of the volumes handled by players such as Fiserv and Worldpay. However, the acquiring industry contains niches, and within the e-commerce space, PayPal is a clear leader, which we think places a narrow moat around PayPal’s operations.

However, PayPal's branded business is not an acquirer; its unique model centers on a two-sided platform, with PayPal maintaining relationships with both merchants and consumers. We think this approach has material benefits and was instrumental in allowing PayPal to develop its current foothold in the industry. Having information on both sides of the transaction gives PayPal a meaningful edge in combating fraud, which was a very meaningful factor in the early days of the internet, and remains a key issue. With an ability to combat fraud, PayPal was in a position to become a valued partner on both sides of a payment. Further, the relative ease of using PayPal in an online transaction materially boosts conversion rates, with PayPal transactions converting at a rate of almost 90%, compared with an industry average of about 50%. This highlights the ease of checkout for consumers and the attraction for merchants. With these dynamics in place, PayPal was able to generate a network effect.

We typically think of a network effect as a very strong source of advantage, and one that often gives rise to a wide moat. In PayPal’s case, though, we think the effect is much milder, as the company is a relatively small piece of the overall electronic payment infrastructure. We think PayPal will remain a preferred partner in the online world, given the relative convenience and security of its platform, but its market position is not so strong that the company can dictate terms to other players or gobble up increasing amounts of market share. In our view, the limitations of the network effect are most apparent in the company’s decision years ago to switch to neutrality in terms of payment choices (that is, to allow consumers to choose their method of funding, as opposed to being defaulted to funding options that are more advantageous for PayPal).

Outside of its legacy PayPal business, we think its Braintree operations also benefit from a narrow moat due to scale-based cost advantages. While Braintree is smaller than competitors Stripe and Adyen, and volume growth is currently constrained by the shift toward more profitable business, it has grown quickly historically and looks to have carved out a position as a long-term leader. We think Venmo benefits from a network effect. However, moats in this area are somewhat speculative, given the lack of profitability and uncertain long-term economics.

Given the limited capital needs of the business, historical returns on invested capital have been dramatically higher than any reasonable estimate of the cost of capital.

There is still plenty of runway for growth in electronic payments.

The scalable nature of the business could allow PayPal to improve its margins over time.

PayPal’s long-running experience in online payments is a unique asset that is becoming more valuable as e-commerce becomes a bigger piece of the pie.

PayPal is increasingly coming into competition with larger companies and recent results suggest its market share is slipping.

Alipay and WeChat provide examples of how governments could favor local players, and this could shut PayPal out of a number of emerging market opportunities.

Opportunities to monetize Venmo could be limited.