PayPal Holdings Inc

PayPal has shown strong performance, leading the field with a +31.7% return. The fund has increased its holding in PayPal, indicating confidence in its growth potential. The investment philosophy focuses on undervalued companies with high earnings power, and PayPal fits this criterion as it is viewed positively amidst market pessimism. The manager's strategy emphasizes long-term value, suggesting that PayPal's current trajectory aligns with their investment objectives.

We added PayPal to the portfolio due to the shareholder-friendly capital allocation. The enormous free cash flows allow the company to buy back a large amount of shares, which provides us (as investors) with a growing share of the pie and the profits – all with an expected P/E ratio of only 9.5.

We exited our entire PayPal (PYPL) position (1.1%). When we invested in October 2024, the thesis was simple. Revenues were still growing at +8%. Valuations were cheap at ~11x EV/FCF (~9% FCF yield). A new CEO, Alex Chriss, was brought in from Intuit to turn things around. If he could reaccelerate growth, multiples could re-expand to 15-20x. Returns of 20-25% CAGR were plausible. We were wrong... PayPal’s operational bloat and the extent of the required fixing and consolidation were severely underestimated. Growth decelerated from high single digits to low single digits. Product execution remained subpar. Patience with the board wore thin, and when CEO Alex Chriss was replaced, our remaining confidence was gone.

PayPal Holdings detracted from performance during the most recent quarter, reporting healthy +8% volume growth across its branded checkout portfolio, driven by +10% growth in the U.S., leading to +12% growth in adjusted earnings per share. However, the company also reported a slowing in its volume late in the quarter, attributed to a weaker macro environment and slower than expected uptake in new checkout initiatives. Additionally, PayPal announced it would make significant investments in the emerging agentic commerce industry, partnering with AI developers to integrate with popular assistants like ChatGPT. The combination of slowing transaction volumes and increased expenses is expected to result in slower profit growth than previously anticipated.

PayPal (PYPL) is positioned for significant growth despite recent challenges. The company has seen a 42% increase in revenue per share and a 54% increase in free cash flow per share over the past three years, even as its share price has declined by 37%. With a new CEO focused on reinvigorating the brand and integrating acquisitions, PayPal is ramping up investments in product innovation while maintaining strong margins. The stock trades at an attractive valuation with a 10% free cash flow yield, and even conservative growth estimates suggest a potential annualized return of ~20%+ in the medium term.

PayPal was a big winner of the internet era, giving its 500 million users a safe and simple way to pay online. It remains highly profitable, yet its share price has fallen over 80% from its 2021 highs. It is valued at only 10x earnings despite a resilient core business and opportunities to accelerate growth.

We have increased our stake in the payments company PayPal. We believe the market has yet to fully acknowledge the changes being implemented by the new management team since the arrival of its CEO, Alex Chriss, whose clear focus is on improving the company’s profitability, increasing the usage and monetization of underutilized products (such as Venmo and its Buy Now, Pay Later financing service), strengthening its presence among small and medium-sized businesses, and optimizing the company’s core products. All of this is being supported by an ambitious share buyback program, which, in our view, is generating significant value at PayPal’s current stock price.

PayPal Holdings, despite being a leading detractor in portfolios during the third quarter, is showing promising growth with earnings per share increasing by 18% and adjusted transaction margin dollars growing by 8%. The company is expanding its Venmo-branded revenue through monetization initiatives and has negotiated better economics with its high-volume processing segment, Braintree, which is expected to accelerate revenue growth into 2026. Although shares are trading at depressed multiples, PayPal is strategically investing in emerging areas of commerce, including partnerships with Google and expanding its stablecoin offerings.

PayPal Holdings was a leading detractor from performance for portfolios during the quarter. The Company's branded checkout grew by a healthy +6% while total payment volumes grew by +7% during the Company’s most recent quarter. PayPal also outlined several reinvestment initiatives across its platform that continue to accelerate its branded checkout volume growth back to double digits. In addition, the Company has authorized nearly $20 billion in share repurchases which represents nearly a third of its market cap as of quarter end. We continue to hold PayPal as one of our largest active weights in portfolios.

PayPal was a detractor for the quarter, with the stock price declining significantly more than the few percentage points decline in our appraisal value after mildly disappointing results. Growth was in the mid-single-digit range when the market was hoping for high-single-digits. While we trimmed part of our position early in the quarter, in hindsight a larger reduction would have been prudent. However, we continue to see a compelling path forward for this high-quality business, which is still not optimized under relatively new CEO Alex Chriss.