PayPal: A Contrarian Gem at 14x Earnings with AI-Driven Catalysts Ahead

PayPal (PYPL) has become a contrarian's dream. With its stock down 24% year-to-date and trading at just 14x 2025 non-GAAP earnings, the company is priced as if it's in a perpetual slump—despite clear signs of margin discipline, strategic reinvention, and upcoming catalysts. This is a rare opportunity to buy a fintech leader at a fraction of its peers' valuations while it bets big on AI-driven commerce. Let's unpack why now could be the time to act.

The Undervaluation Case: Profitability, Not Just Revenue, Is the New Play

PayPal's Q1 2025 results underscore a seismic shift: the company is no longer chasing top-line growth at all costs. Revenue dipped 1% to $7.79B due to the intentional shedding of low-margin unbranded PSP (Payment Service Provider) transactions. But this move boosted profitability, with adjusted EPS soaring 23% to $1.33—well above estimates—and operating margins expanding to 20.7% (non-GAAP).

The key metric here is transaction margin dollars, up 7% to $3.7B. This reflects CEO Alex Chriss' focus on high-margin segments like Venmo and value-added services (VAS), which grew 17% in Q1. Venmo itself is a hidden gem: its revenue rose 20%, with TPV hitting $75.9B (+10%) and debit card users surging 40%. Meanwhile, Pay with Venmo transactions jumped 50%, proving its ecosystem is sticky and monetizable.

Why the Market Is Missing the Bigger Picture

Investors have punished PayPal for slowing TPV growth (3% Y/Y, excluding unbranded PSP declines) and macroeconomic worries. But this overlooks two critical points:
1. The Strategic Pivot Is Working: By exiting unprofitable contracts and focusing on branded checkout (PayPal + Venmo), TPV grew 6% in core segments. This trend will accelerate as omnichannel partnerships (e.g., Starbucks, DoorDash) drive engagement.
2. Valuation Is Deranged: At 14x 2025 EPS, PayPal trades at less than half the multiple of Adyen (50x) or Square (35x). Its EV/EBITDA of 9.9x is a screaming deal compared to the Credit Services industry median of 19.5x.

Catalysts to Ignite the Next Leg of Growth

The real kicker? PayPal isn't just a value play—it's building a future where AI automates commerce. Its Agentic Commerce platform (launched via PayPal Open) aims to let AI agents execute end-to-end transactions, from inventory checks to payment processing. This could unlock a “multi-billion-dollar opportunity” by 2026, as merchants use PayPal's cloud-integrated tools to cut costs and boost efficiency.

Other catalysts include:
- Venmo's Debit Card Play: With 2 million new users added in Q1, the debit card's 6x higher transaction volume per user positions it to dominate the “pay with Venmo” space.
- Buybacks to the Rescue: A $6B share repurchase program through 2025 will reduce shares outstanding by ~9%, directly boosting EPS.
- Margin Expansion Runway: Cost cuts (including a 4% reduction in operating expenses) and AI-driven automation could push margins toward 25% in the next 18 months.

Risks? Sure—But Manageable

Critics will point to competition (Apple Pay, Shopify), regulatory headwinds, and China trade tensions. But PayPal's $15.8B cash pile, diversified revenue streams (VAS now 17% of total), and 436M active accounts give it the scale to weather these storms. The real risk? Missing the inflection point as Agentic Commerce takes off and the stock re-rates toward its fair value.

The Bottom Line: Buy the Dip, Own the Future

At $70.55, PayPal is priced for perpetual stagnation—but the numbers tell a different story. Analysts' average price target of $81.53 implies 16% upside, while fair value estimates based on EV/EBITDA suggest a $85.67 target (18.5% upside). With a 9.9x EV/EBITDA, a 20.7% operating margin, and $6B in buybacks, this is a stock primed to reward patient investors.

The contrarian play is clear: ignore the noise about slowing TPV and bet on PayPal's margin machine, its AI-driven reinvention, and its undervalued status. The next 12 months could be the payoff phase.

Act Now: The setup is textbook—cheap valuation, strategic clarity, and a catalyst-rich roadmap. Don't wait for the crowd to realize what's coming.