PayPal's Margin Revolution: Why $94 Is the Next Stop for a Mispriced Growth Machine

PayPal's recent earnings report unveiled a stark reality: the company is no longer chasing transaction volume at all costs. Instead, it's doubling down on a lean, margin-focused growth strategy that investors have yet to fully price in. With a 23% year-over-year EPS surge to $1.33, $3.7 billion in transaction margin dollars, and Venmo's 20% revenue growth, PayPal is proving that profitability, not scale, is its new north star. Yet its stock trades at just $73.43—far below Susquehanna's $94 price target—suggesting the market is mispricing its strategic reinvention. Here's why this undervaluation won't last.

The Pivot to Profitability: Margins as the New Engine

PayPal's shift under CEO Alex Chriss has been seismic. After years of sacrificing margins to grow transaction volume, the company is now prioritizing profitability. The results are clear:
- Transaction margin dollars rose 8% YoY, marking the fifth consecutive quarter of margin expansion.
- Non-GAAP operating margin jumped to 20.7%, up 260 basis points from last year.
- Free cash flow hit $1 billion in Q1 2025, with $1.5 billion in share repurchases.

The market has penalized PayPal for a 0.6% decline in transaction take rate and a $60M revenue shortfall, but these are intentional trade-offs. By tightening its focus on high-margin segments—like Venmo's debit card users and Branded Checkout—PayPal is trading volume for profitability. This strategy is already bearing fruit: its agentic commerce tools and dynamic smart wallets (used in 45% of U.S. transactions) are reducing costs and boosting stickiness.

Venmo's Monetization: The Undervalued Catalyst

Venmo isn't just a side hustle—it's PayPal's growth engine. Its $75.9 billion TPV in Q1 2025 was up 10% YoY, but the real story is monetization:
- Pay with Venmo transactions surged 50%, with partnerships at DoorDash and Starbucks driving offline adoption.
- Debit card MAUs rose 40%, turning Venmo into a true financial platform (not just a peer-to-peer app).
- Analysts estimate Venmo's contribution to PayPal's 2025 EPS could hit $1.50, up from $1.20 in 2024.

Critics argue Venmo's revenue still lags its TPV growth, but that's precisely the point: the company is monetizing deeper. The debit card's interchange fees, merchant fees, and credit offerings (e.g., Venmo Loans) are all underpenetrated. At current valuations, Venmo's potential remains vastly underappreciated.

The $94 Re-Rating Argument: Why the Market Is Wrong

The disconnect between PayPal's stock price and its fundamentals is stark. At $73.43, the stock trades at a 14.25 P/E ratio, below its five-year average of 18x. Analysts like Susquehanna see this as a buying opportunity, citing:
1. Margin expansion runway: PayPal's 20.7% operating margin is still below peers like Square (now Block) and Stripe, which operate at 25–30%.
2. Cash flow dominance: With $6–7 billion in free cash flow guidance for 2025, PayPal can fund growth, buybacks, and dividends without dilution.
3. Strategic assets: Branded Checkout (already adopted by 45% of U.S. sellers) and Venmo's 40M+ MAUs create a defensible moat.

The $94 target assumes PayPal can hit its low-teens EPS growth by Geli, driven by Venmo's monetization and cost discipline. Even if revenue growth stays muted, the margin tailwind alone could push EPS to $5.60+ by 2026, justifying a 16x multiple.

Risks, but Not Deal-Breakers

Bearish arguments focus on macroeconomic headwinds, Apple/Shopify competition, and regulatory risks. These are valid, but PayPal is insulated by its scale and sticky products:
- Consumer health: Charge-off rates in core credit portfolios are improving, signaling resilience.
- Merchant adoption: Over 45% of U.S. sellers now use Branded Checkout, reducing reliance on third-party platforms.
- Innovation: Agentic commerce tools (e.g., AI-driven inventory management) could open new revenue streams.

Buy the Dip: PayPal's Turnaround Is Underway

PayPal's stock is a classic value play: a $73 price versus a $94+ target, with a 23% upside, is compelling. The company is executing its margin-focused pivot flawlessly, and the market is still pricing in old fears about volume growth. Investors should ignore the noise about TPV misses and focus on the fundamentals: profitability is up, cash flow is strong, and Venmo is just getting started.

Recommendation: Add PayPal to your portfolio at current levels. The $94 re-rating is achievable within 12–18 months, and even a modest multiple expansion to 16x would push the stock to $82+. With $1 billion in cash flow this quarter alone, the margin revolution is real—and the market will catch up.

Final Call: Buy PayPal. The pivot to profitability isn't a fad—it's the future.