PayPal Holdings (PYPL) is a consumer-facing payments platform with over 400 million active customers around the world. After disappointing fourth-quarter results and a CEO transition, the stock sold off, creating an opportunity for us to acquire our position at an average price of $43.53. We believe PYPL’s collection of payment assets is worth substantially more than the 8x earnings we paid. PYPL ended the quarter at $43.18. Subsequent to quarter-end, Stripe and Advent International reportedly made a joint offer to buy PYPL for $60.50 per share.

I bought PayPal because I believed the market was valuing a durable, cash-generative payments franchise as though it faced permanent structural decline. My analysis suggested that even under conservative assumptions, intrinsic value exceeded the market price by a meaningful margin. Since then, two things happened. On July 14th, Stripe and Advent International offered $60.50 per share, a ~52% premium to my entry. Q2 results provided additional evidence supporting several elements of the original thesis, including stabilization in branded checkout and continued growth in Venmo and Braintree. Management raised full-year guidance for transaction margin dollars and EPS, reinforcing the investment thesis.

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 exited PayPal at a slight loss because our investment thesis broke when the Board abruptly fired the CEO and appointed a successor, a former HP executive with no payments, technology, or product experience. Our original thesis rested on a capable management team investing to rebuild the technology, product, and brand. When the facts changed, we acted accordingly.

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.

PayPal is mentioned as part of a diversified mix of high-quality businesses in the portfolio. The manager discusses the overall strategy of seeking investments that are likely to produce sound returns, but does not provide a specific argument or directional stance regarding PayPal itself.

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.