PayPal Shares Sink Despite Upbeat Guidance. Is This a Golden Opportunity to Buy the Stock?

PayPal (NASDAQ: PYPL) shares dropped as much as 13% after the fintech reported solid fourth-quarter results and issued an upbeat outlook on Feb. 4. But the stock is still up almost 30% during the past year as of this writing.

Let's take a closer look at PayPal's fourth-quarter results to see if this pullback is a good opportunity to buy the stock.

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An upbeat outlook

For the fourth quarter, PayPal's revenue rose 4% to $8.36 billion, which came in above the $8.26 billion average estimate as compiled by the London Stock Exchange Group.

Total payment volume (TPV) increased 7% to $437.8 billion. Payment transactions fell by 3% to 6.6 billion, while payment transactions per active account rose 3% to 60.6 on a trailing-12-month basis.

Branded checkout TPV increased 6% on a constant currency basis, similar to last quarter, while unbranded TPV (which involves transactions that are not consumer-facing and operate in the background) edged up 2%. The company has recently pulled back a lot on unbranded volume growth, which was up 14% for the entire year.

Instead, it has been focusing on a price-to-value strategy (i.e., determining the highest price its customers are willing to pay for something) and value-added services, which has led to decelerating unbranded TPV growth. TPV at Venmo, its money-transfer app, was up 10%, an acceleration from 8% growth last quarter.

Active accounts increased 2% year over year to 434 million, and were up 0.5% sequentially.

Transaction margin dollars, which are similar to gross profits, jumped 7% to $3.94 billion. This is one of the key metrics that PayPal investors follow. In the past, the company has been able to increase revenue, but it was coming from lower-margin businesses. Chief Executive Officer Alex Chriss has put the emphasis on PayPal boosting its gross profit dollars, not just revenue.

Adjusted earnings per share (EPS) increased 5% to $1.19, topping the $1.12 analyst average estimate.

The company generated free cash flow of $2.2 billion in the quarter and $6.8 billion for the year. It repurchased $1.2 billion in stock during the quarter and ended the year with net cash and investments of $4.3 billion.

PayPal also announced a new $15 billion stock buyback program, which will be in addition to the $4.86 billion remaining on its current plan.

One of PayPal's key innovations, Fastlane, has been performing well. Fastlane helps retailers improve conversions by letting customers check out with just a single tap without having to set up individual accounts at different merchants. The company said it now has nearly 2,000 merchants using Fastlane.

It also said that 75% of Fastlane users have been new or dormant PayPal users. The company has also seen good momentum with its Venmo debit card.

Management forecast little changed to low-single-digit percentage revenue growth in the first quarter, with adjusted EPS between $1.15 and $1.17, representing a 7% increase at the midpoint. It expects its continued renegotiations with Braintree (unbranded checkout) to be a revenue headwind. Nonetheless, the EPS forecast was above the $1.13 analyst average estimate.

For the full year, it is projecting transaction margin dollars growth of about 4.5% to between $15.2 billion to $15.4 billion. This includes a 1% headwind from lower interest rates. The company is looking for adjusted EPS of $4.95 to $5.10, representing 8% growth at the midpoint. Analysts were forecasting 2025 adjusted EPS of $4.90.

Image source: Getty Images

Is it a good time to buy the dip in the stock?

Investors may be a little worried about the big slowdown of volume growth in Braintree's unbranded checkout, but this is all a part of PayPal's plan to get paid what it believes it deserves. Sacrificing low-margin revenue for higher-margin revenue will be good for the company in the long run.

Meanwhile, innovations such as Fastlane appear to be seeing solid early momentum. The company also formed a number of partnerships last year to help drive Fastlane adoption, which appears to be working. PayPal is also doing a good job of starting to monetize its popular Venmo app through its Venmo debit card and Pay with Venmo.

Looking at valuation, PayPal trades at a forward price-to-earnings ratio (P/E) of about 15.5 times the high end of its 2025 EPS forecast and a forward price-to-sales ratio (P/S) of just 2.2 times based on 2025 analyst revenue estimates.

With the company focusing more on profitable growth than just revenue growth, I think that is a pretty attractive value, and I believe Chriss has done a good job since taking over as CEO a little more than a year ago, refocusing PayPal's priorities and leaning into innovation and better ways to monetize its businesses. As such, I would take advantage of the dip in the stock and be a buyer at current levels.

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Geoffrey Seiler has positions in PayPal. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: long January 2027 $42.50 calls on PayPal and short March 2025 $85 calls on PayPal. The Motley Fool has a disclosure policy.