PayPal Holdings Inc (NASDAQ: PYPL) second-quarter earnings arrived with adjusted EPS of $1.38 and total revenue of $8.68 billion, management raised its full-year outlook, and the company continued talking up its transformation strategy.
Three months ago, I argued Q1 “respectable” results weren’t enough to change my mind because the business was stabilizing faster than it was accelerating, and the market seemed to agree.
This quarter, something changed.
Not because of the earnings. But because PayPal reportedly received an offer worth more than $53 billion and a $60.50-per-share takeover approach from a consortium led by Advent International and Stripe before rejecting it in favor of remaining independent. Suddenly, this isn’t just a debate between management and public shareholders over what PayPal is worth. There are sophisticated buyers willing to put real money behind a different answer.
The earnings will tell us whether management’s transformation is finally becoming visible in the numbers. The reported bid tells us someone already believes it is.
Cashflow Makes A Stronger Case
If Stripe and Advent did spend months evaluating PayPal, they weren’t buying a turnaround story. They were buying a cash-generating business they believed could become more valuable than the public market was willing to recognize.
This quarter gives them a case to make.
Total Payment Volume rose 10% year over year to $443.5 billion, transaction margin dollars increased 7% to $3.8 billion, and PayPal generated $1.8 billion in free cash flow during the quarter. The company also repurchased roughly $1.5 billion of its own shares while raising full-year guidance for both non-GAAP earnings per share and transaction margin dollar growth. It’s difficult to argue the business is fading when it’s still throwing off billions in cash and funding its own transformation in this fashion.
But there’s another side to the ledger.
Operating margin narrowed, transaction margin slipped to 44.9% from 46.4% a year ago, and profitability still isn’t expanding at the same pace as payment volume. That’s the same tension I pointed out after Q1. More payments alone don’t automatically create a more valuable business. The market wants proof that PayPal’s transformation can lift the economics of every transaction, not simply process more of them
Growth Needs Better Execution
One reason I wasn’t willing to own PayPal Holdings after last quarter was that the company’s transformation story remained largely theoretical. Management kept talking about branded checkout, Venmo, Braintree, and new commerce initiatives. However, the financial statements still looked like those of a mature payments company fighting for incremental growth rather than creating a new earnings engine.
This quarter doesn’t completely erase that concern, but it does give the strategy more credibility.
Branded Checkout returned to healthier growth, Venmo continued expanding beyond peer-to-peer payments, and management is putting more emphasis on merchant services, advertising, in-store payments and AI-powered commerce. None of those businesses will transform PayPal overnight. Together, however, they point toward something larger: generating more revenue from each merchant and customer already inside its network instead of relying primarily on processing more payment volume.
That’s why you need to pay attention to the reported takeover.
See, Stripe isn’t trying to buy PayPal because it processes payments. Stripe already does that exceptionally well. If the reports are accurate, the attraction is more likely the combination of PayPal’s global consumer network, merchant relationships, Venmo ecosystem and cash-generation potential. Those are strategic assets that can become more valuable under the right execution… and exactly the kind of assets public markets often undervalue while focusing on quarterly growth rates.
Trend Finds New Direction
In the last quarter, I said PayPal’s chart looked “supported, not sponsored.” Buyers were willing to step in after earnings, but not with enough conviction to change the longer-term trend.
Well, that is harder to defend now. PayPal has broken the downtrend that defined much of the past year, reclaimed its 20-day and 50-day moving averages, and is now trading comfortably above both while approaching its 200-day moving average. More importantly, the stock is making higher highs and higher lows instead of simply bouncing after earnings. That’s the kind of price structure that suggests institutions are accumulating positions rather than merely covering shorts.
There’s another detail that’s difficult to ignore. The stock is trading around the same level as the reported $60.50-per-share takeover approach. Whether a deal eventually materializes is almost beside the point. The reported bid has introduced a second reference point for valuation, one that’s no longer coming exclusively from public markets.
From the way I see it, investors are becoming more willing to give management the benefit of the doubt.
Watch, Don’t Change
Three months ago, I argued that PayPal wasn’t a broken business, but one that hadn’t done enough to earn investors’ conviction. I don’t think this quarter completely overturns that view. That said, one thing has changed. PayPal is no longer just being judged by public shareholders. Reports that Stripe and Advent explored a roughly $60.50-per-share bid introduced a second opinion, and one from buyers with every incentive to value the business correctly. Private equity doesn’t pay premiums for nostalgia, and strategic buyers don’t spend months evaluating companies they believe are in terminal decline.
I’m still not ready to own PayPal today. But unlike last quarter, I’m also no longer comfortable dismissing it. If management can prove that its transformation translates into sustained margin expansion and stronger profitability, I’d be willing to revisit my thesis. For the first time in a while, PayPal has moved off my “avoid” list and onto my watchlist
