PayPal: Anatomy of a Value Trap
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Strong performance from Expedia
Despite the war in the Middle East and rising energy prices, U.S. consumer spending—and, by extension, travel DEMAND—proved to be sufficiently resilient in the second quarter, from which Expedia also benefited greatly. The company beat analysts’ expectations across all major metrics, with revenue growing by 14%, while also successfully maintaining its strategic goal of cost control, resulting in profit growth of over 20%. Cash generation is very strong, which is being used to repurchase shares, and for now, there's no sign of a slowdown on the demand side, leading the company to raise their full-year expectations for this year. Given the improving fundamentals, we are raising our fair value estimate to $365.
Our latest read on PayPal’s report confirms that what many long regarded as an undervalued opportunity is, in fact, a classic value trap. Weaker-than-expected quarterly results and guidance, the dismissal of the CEO, and mounting structural industry pressures have collectively shattered investor confidence. As a result, we are removing the stock from our Preferred Stocks List.
PayPal’s share price plunged after the company posted weaker-than-expected numbers in its quarterly release and at the same time dismissed the CEO appointed two and a half years ago, whom the shareholders had expected to deliver a turnaround. We, too, waited too long for that turnaround; in hindsight, we should have removed the name from our Preferred Stocks List in 2025—something we are doing now.
Back in late 2023 we were optimistic on PayPal: it’s a strong brand whose share price had fallen sharply from its pandemic-era highs. There appeared to be real potential for a turnaround, especially with the appointment of the new CEO, Alex Chriss. Over the ensuing two-plus years there were several rallies when it looked as if a growth inflection might be taking hold, and most earnings prints were not outright bad. Even so, the reorganization ultimately ran into roadblocks.
The prior November earnings release should have been a warning sign. The stock initially surged, then reversed and has been sliding back ever since. Based on the latest report, this increasingly looks like a value trap—a stock that screens cheap on financial metrics but is not a good investment because the apparent “cheapness” masks persistent, structural deterioration, preventing a meaningful rerating.
PayPal displays the defining features of a value trap: profitability has been deteriorating for a prolonged period, a problem the (now-ousted) CEO was unable to fix—hence the leadership change. The company, like the broader online payments industry, faces structural challenges: competition is intense, the large tech platforms (Apple Pay, Google Pay) dominate, and numerous fintech entrants crowd the space, eroding margins and constraining growth. Crucially, PayPal has failed to deliver meaningful growth in its higher-margin branded checkout segment. For this year, management guides to at best minimal profit growth, whereas analysts were expecting around an 8% increase.
We’re not saying PayPal is entirely hopeless as an investment. However, we won’t wait to see whether a new CEO can engineer an operational turnaround that would finally spark a sustained share-price recovery. Accordingly, we are removing PayPal from our Preferred Stocks List.
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