Payments is a complex space. Shawn always says it makes his head spin. And I get it. It can be dry, and there are so many things we simply don’t know yet. But sometimes, the opportunity is too compelling not to take a closer look.

Today, we’re diving into one of those cases. It’s not flashy. You’ve probably used it a dozen times this year without thinking twice. I’m talking about PayPal.

And before our American readers close the tab and say it’s outdated and no one uses it anymore, remember that Venmo is also part of PayPal. If you use Venmo, you’re essentially using PayPal.

But I’m not pitching it just because it’s cheap or not as dead as you might think. I’m pitching it because PayPal is actively transforming its business.

New CEO Alex Chriss has laid out a clear strategic shift, and I believe PayPal could shed its value trap label sooner rather than later.

Let’s take a look and see whether PayPal deserves to regain its spot in the portfolios of long-term investors.

— Daniel

PayPal’s early story reads like a Silicon Valley legend. It started out as a company called Confinity, founded by Peter Thiel and Max Levchin. Then another company entered the picture: X.com. And by the name alone, you might already guess who the founder was, None other than Elon Musk. Both of these companies set out to completely transform the way payments work. In fact, Thiel even dreamed of creating an entirely new currency.

He didn’t get quite that far, but it’s safe to say they changed how digital payments would work forever. The two companies not only shared a vision, but they also shared the same customers, which turned out to be bad for business. After some boardroom drama (including Musk’s offer to merge while retaining 92% of the equity), the two firms eventually merged in 2000 on a 50/50 deal.

PayPal was born and instantly successful. Within two years, it had become the default payment option on eBay. In case you're younger than Shawn and me, eBay used to be a big deal. It's hard to imagine now, but there was a time before Amazon dominated the e-commerce market.

Since eBay’s and PayPal’s futures seemed closely tied anyway, eBay decided in February 2002, just seven months after PayPal went public, to acquire the company for $1.5 billion and take it private again.

This marked a new chapter for PayPal. The so-called PayPal Mafia left the company. Peter Thiel went on to found Palantir and became the first outside investor in Meta (then Facebook). Musk started his ventures at Tesla, and later SpaceX and X. Many other early employees became highly successful as well. Reid Hoffman, for example, founded LinkedIn, and Max Levchin founded Affirm.

The problem for PayPal was that the departure of all these brilliant people, combined with eBay's ownership, significantly slowed down its drive for innovation. eBay didn’t need PayPal to do much more than facilitate their auctions. For PayPal, though, that meant stagnation. That’s why, in 2015, activist investor Carl Icahn finally got his way, and PayPal was spun off. Dan Schulman became the new CEO, and PayPal embarked on a highly successful run.

Like most great runs, though, PayPal eventually hit a wall. We all love the stories of companies like the Magnificent Seven or Visa and Mastercard, compounding steadily for decades, but let’s be honest: those are the exception, not the rule. For a while, PayPal looked like it might be one of them. But then it crashed, along with just about every other high-flying tech stock from the late 2010s and early 2020s. During the lockdowns, everyone tried to escape boredom by scrolling through social media or going on an online shopping spree.

Stimulus checks probably added fuel to the fire, boosting e-commerce on one end and stock market investments on the other. It was the perfect setup for PayPal: surging users, payment volumes, and revenue. But when the world opened up again, all of that reversed. The idea that PayPal (and other tech names) could grow at 20%+ forever started to break down. Looking back, it feels obvious. And while many investors knew that markets couldn’t continue to rise indefinitely, there was also a growing belief that consumer behavior might have changed fundamentally.

Just look at Nike. They went all-in on (digital) DTC, betting people wouldn’t return to physical wholesale the same way ever again. There was a similar belief that cash usage would collapse permanently post-COVID. But when those trends reversed, the macro tailwind turned into a headwind, and with valuations still sky-high, the bubble burst. That’s how PayPal, like much of the sector, ended up in free fall.

But it wasn’t just about the macro. PayPal’s management also made a series of serious missteps. I looked into the company briefly in late 2022. The valuation was compelling, but numerous yellow flags led me to pass, fortunately, as it turned out.

So what exactly went wrong? And more importantly: has that changed? (Spoiler: It has. That’s why we’re talking about PayPal today.) But before we get to the turnaround, let’s rewind and look at where things started to go off track.

Former PayPal CEO Dan Schulman had a big vision for the company. He wanted to turn it into a “super app,” similar to China’s WeChat or Alipay. To achieve this, PayPal introduced features such as savings accounts, cryptocurrency trading, shopping deals, bill payment, and even messaging — all bundled into a single app.

There are plenty of reasons why super-apps thrived in China but failed to gain traction in the West, and PayPal proved that again. The plan fell flat. Instead of boosting engagement, it left users confused. And rather than doubling down on what PayPal already did well, the company spread its resources thin across features it couldn’t compete on, especially against more focused, specialized players.

Another misstep was the aggressive push to grow user numbers. As part of his super-app vision, Dan Schulman set an ambitious goal: 750 million users by 2025. Well, here we are, and PayPal is still sitting at around 430 million. Schulman is no longer CEO, and nearly the entire management team has been replaced. Only one executive remained under the new CEO, Alex Chriss. And that CEO change brings us to the next, more exciting chapter.

Alex Chriss is PayPal’s current CEO. He joined the company in late 2023, bringing years of experience from Intuit, where he had worked closely with small and medium-sized businesses.

And it’s fair to say he seems like exactly the kind of leader PayPal needed. Chriss has refocused the company on innovation and doubled down on PayPal’s core strengths. When he took over, PayPal looked more like a loose collection of acquisitions than a cohesive platform. In fact, some of its business units were even competing with each other. I never understood why sending money between PayPal and Venmo wasn’t a thing. Perhaps, it soon will.

All those acquisitions did help drive top-line growth, but very little of it reached the bottom line. Chriss described it as “empty calories.” A large chunk of those calories came from the B2B segment, particularly Braintree, which powers payments for major enterprises like Uber and Adobe. But as is often the case in payments, margins on the merchant-facing side are much thinner than on the consumer side, largely because big clients have far more bargaining power.

In recent years, Braintree has been a major driver of PayPal’s payment volume growth. In 2024, it processed around $575 billion, roughly a third of PayPal’s total volume. But the fees on that volume were razor-thin, at just about 25 basis points. That’s why Alex Chriss made the call to scale back this part of the business and cut the lowest-margin contracts. This strategic shift is also the main reason why PayPal’s revenue growth has slowed in recent quarters.

The high-margin parts of PayPal’s business are starting to show signs of reacceleration. Peer-to-peer payments — including both the PayPal app and Venmo — grew 8%, with Venmo alone up 10%. Branded checkout, featuring the familiar PayPal button, continues to grow at a mid-single-digit pace. But there’s a new initiative that could give it a boost: Fastlane, a guest checkout solution similar to Stripe’s Link.

Instead of spending what feels like forever filling out your info on a guest checkout page, Fastlane saves and pre-fills everything for you. Nothing groundbreaking, but a simple, convenient tool that could drive significant volume. And with the guest checkout market estimated at over $1 trillion, I guess there’s room for both Link and Fastlane to thrive.

The point is: PayPal is far from dead. If you strip out the current headwinds from Braintree, this is a business that could easily grow revenue at double-digit rates. And once we get to buybacks, you’ll see just how much faster earnings per share can grow.

But before that, let’s talk about the new initiatives that really get me excited about PayPal’s future.

The first opportunity comes from one of our favorite business models — advertising. Honestly, it’s almost surprising that PayPal hasn’t tapped into its massive data trove sooner. We’re talking about detailed purchase data from over 400 million users. Not just what they buy, but also when, where, how often, and even in what size and color. As the Wall Street Journal once put it: “It has your money and your pants size.” Visa could only dream of that much detail.

Now, PayPal is finally turning that into a business unit. When we talk about advertising, it’s important to distinguish between the data you have and the real estate where you can display ads. Amazon is the gold standard for both highly detailed customer data and prime ad placement. PayPal’s data is just as powerful, but I’d argue its real estate is underrated as well.

There are several ways PayPal can show ads. Broadly speaking, there are two types of ads: “Before the sale” and “After the sale” ads. “Before the sale” ads show up, well, before any purchase is made. I just booked my summer vacation for this year, a trip with two long-time friends. At this point, it’s practically an annual tradition. Naturally, I paid for everything using PayPal. Now think about it: PayPal knows exactly where I’m going, what I’ll be doing, and, based on my past purchases, what I might still need.

PayPal can now send highly targeted ads in the app right after my friends send me the money for their share. For all our American readers who don’t use PayPal (Shawn keeps reminding me he doesn’t know anyone who uses PayPal), the same is also possible on Venmo, of course.

The other option is “After the sale ads.” As you might’ve guessed, these show up after you’ve made a sale. One way PayPal achieves this is through so-called “Smart Receipts,” personalized recommendations based on what you have just purchased. What surprised me, and might surprise you too, is that over 40% of PayPal users open their receipts. That means these Smart Receipts will reach millions of people at a time when they’re still in shopping mode.

Beyond the PayPal and Venmo apps, ads will also show up in what PayPal calls “buy now storefronts.” These are embedded across the open web, but unlike traditional display ads that push users to a merchant’s website, these let you complete a purchase instantly using “Buy with PayPal,” without ever leaving the page.

To build all this, PayPal brought in Dr. Mark Grether, the same guy who helped build and scale the ad businesses at Amazon and Uber. I probably don’t need to explain how successful those turned out. And technically, we already have — in earlier episodes.

More long-term, but perhaps an even bigger opportunity, is agentic commerce. AI is transforming how we conduct nearly everything online. And since a big part of our time online is spent shopping, it’s no surprise that AI will reshape this, too.

Today, most people still shop or book trips through mobile apps or websites. However, we are increasingly spending our time on AI tools like ChatGPT. Now imagine a future where you don’t just ask ChatGPT for the best summer destinations, you book the entire trip right there. That’s possible if payment apps like PayPal are integrated directly into these AI platforms. An AI agent could compare prices, book flights and an Airbnb, and even pay — all without the user ever opening a browser.

Just a couple of weeks ago, I would’ve said this future was still far out. But it turns out I might be wrong (fortunately). ChatGPT just introduced AI agents that can already perform many of the tasks I mentioned above. They aren’t integrated with payment services yet, but I don’t think it’ll take long (Perplexity and PayPal have already partnered to enable instant checkout capabilities on the Perplexity Pro platform this summer!). We recently hosted a call in our Intrinsic Value Community on the use of AI in investing, and it reminded me again just how quickly things are changing. It’s wild.

AI agents can also change how we use the PayPal and Venmo apps. All the manual tasks users currently perform could soon be handled much faster and more efficiently through AI. For me, a perfect example is subscription management. I often forget to cancel subscriptions, despite PayPal offering a relatively easy tool for doing so.

Now imagine an embedded AI assistant that just handles all of that — no reminders, no more paying for stuff you don’t use anymore. It could even reorder the essentials I buy every month, or suggest birthday gifts and buy them on the spot. That last part really matters, because those are the kinds of moments where I’d actually stick around and chat with the AI for a bit. It keeps me in the PayPal (or Venmo) app longer, and starts turning it into more of a shopping platform.

That’s something PayPal technically always had the potential to become, but the issue has been user engagement. Users just don’t stay in the app long enough. That could change if they execute well on these new AI agents.

Don’t get me wrong, I know a lot of this still sounds speculative. And to be clear, it’s not something you’d include in a PayPal valuation today. But that’s what makes it exciting: it is potential upside with virtually no downside. As you’ll see later on, it’s not eating up billions in R&D or capex, and none of this optionality is priced into the stock. If it works? Amazing. If it doesn’t? We’re still left with a cash-generating machine that’s aggressively buying back shares and growing its core business.

And speaking of growing that core business, let’s tackle one of the biggest concerns investors have: competition.

Since PayPal operates on both the consumer-facing and merchant-facing sides, it faces competition from both ends. Starting with the consumer side, the biggest threat here is undoubtedly Apple Pay. Apple’s solution has seen massive adoption in recent years, largely due to its seamless integration into the iPhone experience. That makes it incredibly convenient for in-store payments.

However, that’s not a market where PayPal has ever had a significant presence. Apple Pay primarily replaces physical credit or debit cards, whereas PayPal has historically been strongest in online checkouts, rather than at the point of sale. In Germany, for example, PayPal is the undisputed number one for online payments — well over 90% of e-commerce shops offer it as a checkout option. In the UK, it’s over 80%, and even in the U.S., it reaches 77% when considering the top 1,000 online stores.

Still, Apple Pay’s growth matters because it can influence customers' checkout choices when shopping online, especially on mobile. Perhaps that’s why PayPal is trying to gain a stronger foothold in in-store payments. Just a couple of weeks ago, they launched contactless iPhone payments in Germany to compete with Apple Pay. I don’t use Apple Pay (despite having an iPhone), but I use PayPal for everything, so I might actually use it. Having said that, I don’t see any clear advantages over Apple Pay, and I don’t think many people will switch.

Apparently, PayPal accepts more credit cards than Apple Pay, so some people who have problems uploading their cards to Apple Pay may use this opportunity to switch services. Still, I doubt it will have a significant impact.

That might be different on Android phones, though, where Google Play is the most widely used service, but nowhere near as dominant as Apple Pay on iPhones. The only reason Apple even has to allow PayPal is due to new regulations. Who knows, maybe we’ll eventually see third-party services come in, improve the in-store checkout experience, and chip away at Apple Pay’s dominance. Unlikely? Sure. But not impossible.

When considering risks, it’s essential to be specific about what would truly undermine the investment case, rather than oversimplifying it as a general threat. In this case, I’m keeping an eye on Apple Pay’s share in e-commerce payments and comparing it to PayPal’s growth in branded checkout. So far, PayPal appears to be able to hold its ground and grow despite the presence of Apple Pay. But let’s see how that plays out over time.

In the P2P segment, PayPal. (and Venmo) compete with strong domestic players like Zelle and Cash App. Zelle, backed directly by major U.S. banks, has become popular as a way to instantly send money between bank accounts, especially among users who already have traditional banking relationships. However, Zelle lacks Venmo's social element and app infrastructure. It doesn’t include a wallet, and the app has been discontinued, so you have to use it through your banking app.

Then there’s Cash App, owned by Block (formerly Square), which has built a loyal user base among a different demographic, typically younger, lower-income, and often unbanked or underbanked consumers. Cash App offers an intuitive digital wallet experience, along with features like stock and Bitcoin investing, making it especially attractive to users who find traditional banking inaccessible or unappealing.

The P2P market overall resembles an oligopoly, with current players coexisting by serving largely distinct user bases. While switching costs are relatively low, most users tend to remain loyal to their preferred P2P app for years. In the EU, meanwhile, PayPal is virtually unchallenged — network effects are strong, and nearly everyone uses it.

Now, on the merchant-facing side, things get more nuanced. PayPal competes head-to-head with payment processors like Stripe and Adyen through its Braintree segment — the same segment that, under PayPal’s new strategy, is shifting toward more sustainable and margin-focused growth.

While the headline “merchant discount” charged by Braintree often sounds high, at around 3%, the effective take rate (what PayPal actually keeps as revenue) can be as low as 0.2% to 0.3%, because most of those fees are passed directly to banks and card networks.

Under prior CEO Dan Schulman, PayPal pursued aggressive growth in Braintree’s volume, signing large enterprise deals with razor-thin margins to boost the top line. Since the low-margin business growth outpaced that of the high-margin business, PayPal’s overall take rate declined sharply from approximately 2.1% in 2020 to roughly 1.7% today.

The low take rate of PayPal’s B2B business is not a company-specific problem, by the way. Adyen, for instance, operates at a take rate of less than 0.15%. Stripe’s take rate is significantly higher than Adyen's but around the same level as Braintree's, between 0.2% and 0.3%.

The reason is that these companies primarily offer backend payment processing services directly to merchants, who typically negotiate lower pricing due to higher volumes and the transparency of interchange costs. In contrast, consumer-facing payments services, such as PayPal’s branded checkout or cross-border transactions, carry higher take rates, often exceeding 2%, as consumers prioritize convenience and ease of use over price.

Besides the competition from other companies, a growing concern is the rise of stablecoins. In theory, stablecoins pose a potential disruptive threat, especially for cross-border payments, where blockchain technology promises instant settlement at far lower cost than traditional rails. However, they could also act as a form of payment in e-commerce.

If stablecoins become a widely accepted medium for online transactions, it could put pressure on PayPal’s branded checkout. Amazon and Walmart are reportedly considering creating their own stablecoins as payment options for their websites. Now, I totally understand their rationale. Issuing a stablecoin enables them to bypass interchange fees, own a larger share of the payment stack, and gather even more granular data on user behavior.

But while this might make sense for the platforms themselves, the consumer incentive is far less obvious. Paying with a stablecoin doesn’t offer the same level of fraud protection and, most importantly, rewards. And I was told Americans love their credit card rewards (Shawn is the source).

You could technically integrate rewards on a stablecoin, but who pays for that? If Amazon and Walmart do it, that would be as expensive, or even more expensive, than the fees they wanted to bypass in the first place. And merchants that sell on their marketplaces have little incentive to do so either.

Sure, Amazon and Walmart are such powerful marketplaces that merchants might feel like they have no choice but to accept their stablecoins — losing access to that customer base just isn’t an option. The same goes for consumers. Nobody wants to juggle a dozen different stablecoins just to shop online. But if anyone can push something like that through, it’s Amazon. They don’t even offer PayPal, and they’re probably the only site that can get away with that without losing me as a customer.

Ultimately, unless stablecoins can offer a superior user experience, meaningful discounts, or rewards, widespread adoption in e-commerce seems very unlikely to me.

If this should happen, PayPal has already launched its own stablecoin, PYUSD, to explore this potential proactively. I could offer the benefit of bypassing card fees for merchants, while still providing a unified option so that consumers don’t need a dozen different stablecoins to make online payments.

PYUSD hasn’t gained much traction yet, as Tether and USDC dominate the stablecoin market. However, the vast majority of stablecoins are still used for crypto trading. That’s not what PYUSD is for anyway. Perhaps it will start accumulating volume if and when stablecoins become more widely used for sending money to friends or paying merchants online.

PayPal’s business is pumping out around $6 to $7 billion in free cash flow annually, and CEO Alex Chriss is putting that cash to work through aggressive share buybacks. Since he took over, the buyback yield averaged around 8-9%

Currently, that’s roughly 100% of Free Cash Flow — a level that won’t be sustainable in the long run. But Alex Chriss is aiming for 80% to 90% of FCF to go toward buybacks. That’s realistic given PayPal’s asset-light, low-capex business model.

A while ago, Shawn pitched AutoZone, one of the uber-share cannibals whose performance has been nothing short of stunning. Not a lot of growth, but high levels of share buybacks. I could see PayPal taking a similar path with the optionality for much more organic growth.

For my model, I focused on the segments that make up Total Payment Volume (TPV): the branded checkout, the unbranded checkout (also known as Braintree), and the P2P part of the business.

The base case assumes modest growth across all three. Branded checkout grows at 5% annually, P2P slightly faster at 8%, and unbranded checkout is intentionally downscaled, slowing to 2% growth. I didn’t explicitly model the take rate, but over time, the mix shift, driven by stronger growth in branded checkout and P2P, should stabilize and possibly even modestly lift the take rate.

This shift would also support a healthier margin profile. That said, since margins are already at multi-year highs and this is meant to be a conservative base case, I kept them flat.

As a result, Free Cash Flow would grow by just around 3% annually. But that’s where the buybacks come into play. Assuming PayPal allocates 75% to 85% of its FCF to repurchases and I adjust for stock-based compensation, a 5% annual decline in the share count seems reasonable. That alone would effectively triple the FCF per share growth compared to the topline FCF number.

And just to be clear, this model doesn’t include any potential upside from new initiatives, such as the ads business, agentic commerce, or other ventures. Suppose any of them take off and PayPal manages to return to double-digit top-line growth. In that case, we’d likely see not just stronger financial results, due to the high margin nature of those businesses, but also a meaningful re-rating of the stock.

Still, for now, I assume a modest 15x P/FCF multiple and add a 10% margin of safety. By doing so, I arrive at an estimated intrinsic value of approximately $97 per share. At the time of recording the podcast, PayPal traded around $70, which implies an IRR of 16.8% (on paper!) — again without pricing in any optionality from ads, AI agents, or agentic commerce.

Three years ago, PayPal looked cheap on paper, but it was poorly run, innovation had stalled, and competitive pressures were intensifying. Fast forward to today: the stock is even cheaper, but the story has changed.

A new management team is in place, highly aligned with shareholders — their incentive structure is tied to outperforming the S&P 500 on a total shareholder return basis over the next three years. They’re executing on margin expansion, launching promising new initiatives, and buying back shares more aggressively than ever.

Back then, I passed. But this time, Shawn and I decided to act. We’ve initiated a 5% position in the Intrinsic Value Portfolio at an average entry price of $71.

I’ll keep an eye on market share data and whether the new business units can gain the hoped-for traction. I don’t expect to see significant changes in 2025, but 2026 should be the year when positive surprises begin to emerge.

"The time of maximum pessimism is the best time to buy.”

— John Templeton

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