It Might Be Time To Sell and Move On

Hey everyone and welcome back to another video for today. So in today's video, we are going to have yet another, yes, you could call this a bag holder anonymous meeting because we need to talk about mistakes. We need to talk about company that seem to be extremely undervalued on paper, seems to be a no-brainer on paper, and yet turns out to be a mistake so far. And that's of course our dear PainPal. PainPal reported yet another, I guess this quarter was okay, but when the earnings call started, that's when things went the wrong direction. Stock was up actually 3% before the earnings call. And today it's down 8, 9% or so. So what exactly has happened? Well, as you know, three months ago, Alex Kris got out of PayPal, kicked out, left, whatever. We've got a new CEO. Now the thing here is, yeah, okay, it's a new CEO, but that person has been on PayPal's board for five years, which means technically speaking, he should know PayPal inside out. Well, it turns out that even he needs time to understand what the heck is going on inside the company, which to me does not make that much sense because if you are part of the board for the last five years, well, you've probably already seen a couple of things that were right and wrong. Another thing I'd like to add is that everything that was said during this earnings call, the fact that, yes, they need to invest, they need to innovate, things needs to change, blah, blah, blah. All of this was already told to us a year ago, a year and a half ago. Alex Kris came in, already said, we are using legacy systems, these things don't make any sense. We have PayPal, we have Venmo, they don't even talk with each other. All of this needs to change. These are all things that we knew about a year plus ago. Yet right now in 2026, we are getting the same speech again. It doesn't make any sense. Now I understand that these things take time, but again, same thing like we've said three months ago, six months ago, the messaging, the messaging did not make any sense. We went from, okay, we've identified the issues, we've identified the opportunities, and this is what we're going to do. But we went from this all the way to, oh, nothing actually worked, or okay, Venmo, buy now, pay later, that's working out. But all the rest, we went from, okay, we are doing well, things are trending in the right direction, we'll update you on Fastlane and this and that next quarter or a quarter after that. And then we've reached a point where suddenly nothing worked anymore. And this is something I said three months ago when I sold my shares, still kept my options. Now I only have the bull spread for over two years from now, which is December 2028, still holding it at the moment, thinking about maybe reducing that as well, but we'll have to wait on that decision. But you cannot go from point A, skip B, C, et cetera, et cetera, all the way to Z, and then suddenly say things haven't worked out. Either you lied, you didn't tell us everything, which would make sense because we went from A to Z in an instant, or something drastically changed that you did not anticipate, which I don't even know if that's better, right? It could be worse. Because as for a CFO, Jamie Miller, you run this company for quite a while right now, don't you notice that you're supposed to be doing way more with less nowadays, right? PayPal doesn't need 20 plus thousand employees. The CEO basically said, yes, we've launched a very successful product in Germany. Germany is a very big market for them. NFC, okay, great. But we didn't push hard enough. What do you mean? How many more employees do you need? Or are you this disorganized inside of PayPal? Because we are going to have internal reorganizations yet again, which, okay, could make sense. But I'm coming back to the same point time and time again. It is something that we've discussed before. And yes, I do feel that I've earned this moment where, yes, I've been talking about PayPal for a while. I've shown you why it is cheap. And so, yes, I deserve this moment where I can criticize this company a lot because the opportunities were there. If Toby from Shopify was the CEO of this company, PayPal would have been worth a hell of a lot more. If Elon was CEO of this company, it would have been worth a hell of a lot more. If Vlad or the CEO of Revolut was the CEO of this company, it would have been worth a hell of a lot more. Fact of the matter is that you have a company with an insane amount of data, with billions in free cashflow, and yet it seems like they're screwing up this opportunity. Yes, it feels a bit unacceptable because most of us might have done a better job being in charge of PayPal. Now, I'm saying this as an outsider, but I think I've studied this business well enough and studied other businesses well enough to know when things go right and when things go wrong. In this case, they have very good assets and they just didn't do what they had to do, which leads us back to, again, PayPal being down close to 9%. Company worth around $42 billion. It's a cheap company. It's a cheap company even with our assumptions, and I'll show you the DCF yet again. I have adjusted the assumptions. The assumptions have come down to be a bit more bearish, realistic, but still bearish. And you will see that even at this price right now, even at this state with the current guidance, it is still undervalued. But I completely understand why people wouldn't wanna touch this. Even if I gave you free money, you probably would not be buying PayPal today because management is not giving us reasons to trust them. Again, you'll see what I'm talking about when I go over the presentation, but you cannot come out, especially not in this earnings call, your first earnings call as the CEO of this company, and repeat the same thing that we've heard 12 months ago. It's unacceptable. Now, before continuing, you know what to do. If you enjoy this type of videos, hit all the buttons. We'd really appreciate that. Want to support me even further? Do check out the link down in the description and in the pinned comment with the top 10 best stocks to buy now, or go to fool.com forward slash garchainvestor. Thank you very much. All right. These were the numbers for Q1. And again, Q1 was a double beat. Not a big one, but still, okay. Good quarter all in all. TPV actually grew 11% year over year. So we're happy with that. So what went right this quarter? TPV accelerated. Revenue grew 7%. Transaction margin dollars grew 3%. Non-gap EPS still grew 1% despite the investments. Venmo TPV increased 14%. Pay with Venmo grew 34%. Buy now, pay later up 23%. PSP growth accelerated to 11%. And enterprise payments grew mid-teens. Okay, so that's fine. Now, what was not that great is branded checkout only grew 2% on FX neutral, which is 2%. It's better than the 1% that we've seen last quarter. So, okay, maybe that's neutral. Management still guides only slightly positive to low single digit branded checkout TPV growth for fiscal year 26. Quarter to date branded checkout trends are at the low end of the full year range. Europe remains softer with pressure in the UK and moderation in Germany, two of their biggest markets. Profitability pressure. Gap operating income declined 3%. Non-gap operating income declined 5%. Gap operating margin contracted 182 basis points. Non-gap operating margin down 229 basis points. And non-transaction OPEX grew 8%. And so, okay, it's cute that you're saying we need to recommit to the fundamentals, becoming a technology company again. To me, I'll repeat it time and time again, just rip off the band-aid. Just do what you have to do. Take, for once, a lesson from Block and do what is necessary. It's not easy, but it is necessary. So, all in all, Q1 26 compared to Q1 25, okay, there were some positives in this quarter, especially with TPV. Clearly, an acceleration is happening there. As for the customer base, active accounts increased 1% year over year, down very, very slightly quarter over quarter. Monthly actives up 1%, transactions up 7%, transactions per active account is down 1%, and TPA excluding PSP is up 6%. So, engagement looks better when excluding PSP, but account growth remains really uninspiring. Revenue growth came from transactions plus other value-added services, although the other value-added services only increased 10% year over year. Last quarter, that also increased 10% year over year. But the growth rates, to me, as I've said it before, I was expecting this already to be closer to a billion dollars, because that's how you make sure that your margins are going back up. That's how we are expecting some re-acceleration in growth. Remember, the whole point of slowing down Braintree growth was to make sure that margins bottom and maybe even rebound. That didn't happen. Then, what did we get? Okay, an acceleration in growth for PSP, Braintree. That's fine. But this whole point of, for a short period of time, you were willing to slow growth down significantly in order to become more profitable, something here does not make much sense. And now that we are seeing a re-acceleration in growth, well, as you might have imagined, the take rates are still coming down, which you can see right here. Total take rate, 1.8%. Transaction take rate, 1.62%. And so, when we compare this to a delocal, for example, delocal, we know take rate is coming down, but it's coming down a hell of a lot slower than TPV's growth. Delocal is growing TPV by 50 plus percent. Smaller base, I know. But there, the plan actually makes sense. With PayPal, it's the worst case scenario, is take rates coming down, while TPV growth acceleration is not accelerating as expected. It's not decreasing, but it's not growing as fast as we would have wanted it. In the meantime, as you know, it is still a very profitable company with plenty of cash. And so, yes, they are buying back a lot of shares. They are reinvesting in the business. And yes, they are paying a small dividend, which, again, doesn't make much sense. Why pay a dividend if you need to invest that much in the business and you're also buying back more shares? Still, $1.5 billion per quarter, $6 billion for a year. It should be way more. Just don't pay the dividend anymore. Spend that money to invest in the business, which is what you said and what you're saying that you're going to do. Also, they're expecting to save around $1.5 billion over the next two to three years from all of the restructurings and the savings. Okay, seems like a big number. But as a percent, it's really not that big. I think they should be cutting way, way more aggressive. Now, we've talked about the new PayPal structure, checkout solutions and PayPal, consumer financial services and Venmo, which to me, this is basically the equivalent for us Europeans, Revolut. Venmo should be the Revolut of the United States and that alone should be worth more than the whole of PayPal today. And then payment services and crypto is Braintree, SMB processing, PayUSD is the stablecoin. Based on these new restructurings, they see their total addressable market revenue-wise, checkout, $390 billion, consumer financial services, $210 billion and payment processing and value-added services, $260 billion. Then they said in their slides, PayPal's right to win. PayPal has no right to win anything. You have to go and get what you think you own. There is no such thing as, oh, our right to win. No, other companies out there are probably saying the same thing, but they're doing something about it. And so, yes, while there are certain improvements that have happened this quarter, all in all, it's still not great. It's still not great and especially not if we're looking at the upcoming quarter, if looking at guidance, we can see the following thing. Let me show you the guidance right now. Q2 is not going to look great, which is something that they've told us already right now. It's not going to look great because the year-over-year comparisons are, well, quite difficult. The most difficult of the year. So once we pass Q2, things should be looking easier for the company. And so if we go and put the bullish hat back on, we say, okay, Q2, they are basically saying, you know what, Q2 is difficult. Let's send back the overall guidance and let's try and beat that, especially in the back half of the year. Okay, could be, but then again, if you go and listen to the earnings call, when they start talking, you really don't feel that confident. Now, they have all the assets. I don't know what's going to happen. Are they going to, they say they're not going to sell Venmo or any other part of the business, which, okay, if you want to sell, fine, but I do still think that they need to own part of Venmo because it just makes sense. It's an extremely, extremely valuable asset, but I can't help but think that, yes, they are making all of these changes internally to then sell it for parts. Now, the CEO said he's looking to maximize shareholder value. Okay, maximize shareholder value. How are you going to do that? Because you're saying something that the previous CEO said and CFO said a year ago. So why should we trust you today if what you're saying today was already supposed to happen over the past 12 months? You see the conundrum here. And so if we look at our DCF right here, I did make some changes. So you can see that the bull case has come down a little bit. The base case has come down a tiny bit and so has the bear case. And so I'm putting 20% probability on bull and bear, 60% on the base right now, which brings us at around $66 per share. Now, why and how do we reach that? Well, basically these are the assumptions. Again, all of this is available to you for free. The Google Drive, of course, right now, every time I make a change, it doesn't automatically make the change in the Google Drive. You will have to play around with that. So revenue growth. I did pull everything down. Okay, for the base and the bull case, I am pulling everything down. You can go even more extreme if you want, but based on what we know right now, this is basically what I'm putting here. With the bear case, I am putting here a negative year and then a year of 0% growth. And then it goes back up only, only 2%. As for EBIT margin here as well, I am, I have pulled everything down slightly, but especially the last year is 16%, 18, and 14.1. The bull case, it could be higher. Even with things that are working out, it could. But again, right now, based on the sentiment, based on the messaging, too many unknowns. I am not even sure that PayPal is going to be the same company a year from now, because maybe they're going to sell Braintree or Venmo. So I don't know. So I'm basically putting these numbers right here. I'm basically trying to fly blind and make some correct assumptions here. Not the most bullish assumptions, not the most bearish assumptions either, but yeah, I had to put things down compared to the last time we looked at it. And so yeah, this is basically what we're looking at right now. For the base case, it hasn't really changed that much, even though I am pulling down revenue growth, EBIT margins, and things like that. The stock price, the actual value of the stock today, didn't really change that much. The bull case did change. I think the bull case was around $111 or so, and right now we are sitting at $98. So that's really if all of the changes actually work. If we do actually see a re-acceleration in growth and things like that and the cost savings, they add up, then yes, we should be much, much higher than where we're at right now. And if it doesn't work out, if it doesn't work out, then anyways, we are not that far away from where we're at right now at close to $43 per share. So it is very cheap. You know, you will say, how is this a bear case? Well, again, because this is still a company that's expected to generate $6 billion despite all of the issues. And despite all of the issues, they're still able to generate that much free cash flow. And so yes, this is the bear case, but as you can see, it seems like the bear case has already been priced in. The problem here is why aren't we going above 50? Why aren't we going towards $60 per share? It's because, yes, it's because just like me, someone that has been following this company for quite a while, many like you as well, we just don't trust what they tell us anymore, especially not after what has happened three months ago. We just don't trust them anymore. We just want to see, okay, you're making all of these statements, opportunities here, opportunities there, but actually show us that something is working inside of PayPal. Until that happens, I guess we're going to be stuck around these prices. And I know, I know what many will say, oh, but you should have just sold a year ago. Yes, of course. If I could, I'd go back a year ago and sell all of my shares, of course. But again, if we go back a year ago and look at all the information that was available to us, listen to the earnings call, look at the numbers, et cetera, et cetera, it was very, very cheap. It was very cheap. Just so that clearly the information that was provided to us, what they told us during earnings calls, analyst conferences, was not 100% correct. So yeah, I guess again, lesson learned. And yeah, if we are a certain investor, we've talked about that during the live stream. If we're looking purely at companies that really grow quite a lot, are strong, good management, no need for turnaround stories and things like that, then yes, maybe we should have never looked at PayPal. But we fell into the value trap. No shame in admitting that. So all in all, that's about it for me in today's video. Hope we learned something here. Again, see you all in the next one. Bye, bye. Bye.