PayPal Maintains Huge FCF Guidance Despite Q2 Drop: Is PYPL Stock Undervalued?

PayPal's Q2 free cash flow fell 42% to $656 million, but the company maintained its guidance of $6-$7 billion FCF in 2025. If this happens, PYPL stock could be undervalued, potentially worth over 30% more at $88.35 per share. Despite a drop in free cash flow, most of PayPal's margins were flat or higher, except for free cash flow.

PayPal Holdings (PYPL) reported a significant drop in its Q2 free cash flow (FCF), falling 42% to $656 million from $1.14 billion last year. Despite this decline, the company maintained its guidance of between $6 billion and $7 billion FCF in 2025, on par with its 2024 FCF of $6.767 billion. This consistency in guidance suggests that the recent drop in FCF may be a one-off dip, potentially indicating an undervalued stock.

Most of PayPal's margins were flat or slightly higher, except for free cash flow. For instance, its take-rate (revenue / total payment volume (TPV)) fell just 2 basis points to 1.87% from 1.89% last year, and its transaction margin (TM) rose slightly to 46.38% from 45.76%. However, operating cash flow (OCF) and subsequently free cash flow were significantly impacted by shifts in working capital timing, leading to a 49% drop in FCF from $1.368 billion to $692 million. The company's adjusted FCF was 42.5% lower at $656 million.

Analysts and financial professionals have noted that PayPal's stock, currently trading at $67.75, could be undervalued. If PayPal maintains its 2025 FCF guidance, the stock could be worth over 30% more, at $88.35 per share. This valuation is based on the assumption that PayPal pays out 50% of its FCF as dividends, resulting in a dividend yield of over 5%.

To explore this potential undervaluation, consider the following analysis. PayPal's projected 2026 FCF is $6.9 billion, representing a 10.68% FCF yield given its current market cap of $64.59 billion. If PayPal paid out 50% of this FCF as dividends, it would result in a $3.45 billion dividend, equating to a 5.34% dividend yield. This analysis suggests that PayPal's stock is potentially worth 30.4% more than its current price of $68.04, based on a projected market cap of $84.25 billion.

Analysts agree that PayPal stock is undervalued. According to Yahoo! Finance, the average analyst price target is $84.11, or +23.6% higher than today's price. This consensus indicates that investors may find value in shorting out-of-the-money (OTM) put options on PayPal stock. For example, a $65 strike price put option with a midpoint premium of $1.03 offers a 1.585% one-month yield.

In conclusion, PayPal's recent drop in free cash flow may be a temporary setback, and the company's maintained guidance suggests a potential undervaluation. Investors should carefully consider the financial metrics and analyst consensus before making investment decisions.

References:
[1] https://www.barchart.com/story/news/33863025/paypal-s-maintains-its-huge-fcf-guidance-despite-a-q2-drop-is-pypl-stock-too-cheap
[2] https://finance.yahoo.com/news/paypal-maintains-huge-fcf-guidance-180106251.html