PayPal (PYPL) : the fintech gem the market ignores
2026-06-22 · By Lubin Danilo, founder of Lubin Investment
PayPal is a high-quality business with 400 million active accounts, a globally trusted brand, and structural free cash flow of $4-5 billion per year. The market is penalizing it twice: fintech is out of fashion, and growth has slowed. The result is an unusually low valuation for its actual quality. Here is how I break it down.
- PayPal generates $4-5 billion in free cash flow every year, with a margin above 20%.
- It buys back more than 10% of its own shares every year, mechanically benefiting remaining shareholders.
- Its current valuation (around 8 times annual free cash flow) is well below its historical average.
- The market is punishing two things simultaneously: slowing growth and a fintech sector that has fallen out of fashion.
- Competitive risks are real (Apple Pay, Google Pay, Stripe), but PayPal's moat remains structurally solid.
The classic trap: mixing a good business with a good price
When I look at a stock, I always start by separating two questions that almost everyone conflates. First q: is this a good business? Second question, completely independent: is this the right price today? A great business bought too expensive is still a bad investment. A mediocre business on sale is still mediocre. PayPal is interesting precisely because neither answer is obvious.
PayPal has fallen more than 75% from its 2021 peak. Many people therefore assume it is a business in trouble. But that drop does not reflect the health of the business: it reflects disappointment against wildly inflated growth expectations fueled by the COVID bubble. That is not the same thing. And that is exactly where the opportunity hides, or does not.
What PayPal actually does as a business
PayPal is a digital payments infrastructure. When you buy something online and click the PayPal button, you are using their network. Behind that simple button sits an ecosystem of 400 million active accounts on one side and 30 million merchants on the other. This two-sided network is their core strength.
The company also owns Venmo, the peer-to-peer payments app that dominates in the United States, and Braintree, a technical infrastructure that developers use to integrate payments into their applications. These three legs form an ecosystem that is genuinely difficult to replace overnight.
The moat: why PayPal is hard to displace
The moat is a business's competitive moat: what prevents it from being easily copied or replaced. For PayPal, this moat rests on three things. First, brand and trust: in online payments, a consumer only clicks a button if they trust it. PayPal spent twenty years building that trust. That is not something Apple Pay can buy in six months.
Second, network effects: the more merchants accept PayPal, the more buyers want an account. And the more buyers there are, the more merchants want to integrate it. This self-reinforcing virtuous cycle is the foundation of every great platform. Third, switching costs: a merchant that has integrated Braintree into their payment system does not switch to a competitor in a week. Migration is expensive and risky.
The numbers that actually matter
In my method, I start by looking at free cash flow, not accounting profit. Profits can be influenced by accounting entries, depreciation, and stock options. Free cash flow is the money that genuinely remains in the company's accounts once everything is paid: salaries, investments, taxes. That is the cash the company can use to buy back shares, pay down debt, or make acquisitions.
PayPal generates between $4 and $5 billion in free cash flow per year. Its free cash flow margin exceeds 20%, meaning that for every $100 in revenue collected, more than $20 remain as available cash. That is a very high level of real profitability, comparable to the best software businesses. And this company carries virtually no net debt.
| Metric | PayPal (PYPL) | Context |
|---|---|---|
| Annual free cash flow | $4-5 billion | Stable for 3 years |
| FCF margin | 20%+ | Comparable to top SaaS businesses |
| Valuation (P/FCF) | Around 8x | Well below historical average |
| Share buybacks per year | 10%+ of float | Mechanical reduction of share count |
| Net debt | Near zero | Solid balance sheet, low financial risk |
| Active accounts | 400 million+ | Established global network |
The valuation: why 8x is an anomaly
To measure whether a stock is expensive or cheap, I primarily use the P/FCF (price-to-free-cash-flow): that is the price you pay for the stock divided by the free cash flow it generates each year. A P/FCF of 8 means you are paying for 8 years of that cash. The lower this number, the cheaper the stock relative to what it actually produces.
PayPal currently trades at around 8 times its annual free cash flow. For a company that structurally generates $4-5 billion per year, buys back 10% of its shares annually, and owns the payment infrastructure of global e-commerce, that is abnormally low. By comparison, businesses of far lower quality in the tech sector typically trade at 20 to 40 times their free cash flow.
The market is applying what I call a double penalty: first, the fintech sector fell out of favor after the 2020-2021 euphoria and interest rate hikes. Second, PayPal is perceived as an "ex-growth" company: it no longer grows at 20% per year. These two penalties compound, and the final price seems disconnected from the reality of the business.
Share buybacks: the silent weapon
There is a mechanism that many investors underestimate: share buybacks. When a company buys back its own shares on the market and cancels them, the total number of shares outstanding decreases. If the share count falls while profit stays stable, each remaining share represents a larger slice of the company. It is a quiet way to return value to remaining shareholders without paying a dividend.
PayPal is buying back more than 10% of its shares every year. Over 5 years, that means the total share count could fall by nearly 40%. If free cash flow stays stable, each remaining shareholder will own a meaningfully larger portion of the company. Not spectacular in a single year, but over 5 to 10 years, the compounding effect is very significant.
The risks: let's be honest
I do not build a thesis without looking at what could destroy it. And PayPal faces real risks. The first: Apple Pay and Google Pay are gaining market share in mobile in-store payments. They are natively integrated into phones, something PayPal cannot match. On that specific segment, PayPal is in a defensive position.
The second risk: BNPL (Buy Now Pay Later), popularized by Klarna and Affirm, is attacking the e-commerce segment where PayPal was well positioned. That space is now competitive. Third risk: growth in Total Payment Volume (TPV) is slowing. PayPal is no longer a rocket growing at 30% per year. Finally, the loss of eBay as an exclusive partner historically represented a significant share of transactions that has taken time to replace.
The real debate comes down to one q: will competition structurally erode free cash flow, or does the moat hold? If FCF stays stable at $4-5 billion and buybacks continue, the thesis is solid even without growth. If competition compresses margins, the current valuation is no longer an anomaly but a warning sign.
My assessment: quality and price as two separate readings
In my approach to analyzing stocks, I score the quality of the business separately from its valuation level. On quality, PayPal earns a perfect score in my screening tool: high and stable structural free cash flow, FCF margin above 20%, solid balance sheet with virtually no net debt, aggressive share buybacks, an established network with real network effects. This is a high-quality business.
On valuation, a valuation of around 8 times free cash flow for this quality level represents a market anomaly. The market is too harshly penalizing slowing growth and the "out of fashion sector" factor. This is precisely the type of situation my method is designed to identify: high quality, low price, and an identifiable (but likely exaggerated) reason why the market is making this pricing error.
If you want to analyze other stocks with this same framework, that is exactly what I built on <a href="/analyser">my investment site</a>. You can also check the <a href="/analyse/PYPL">full PayPal analysis</a> with all indicators updated in real time.
My takeaway
PayPal is a solid company with a real moat, abundant cash generation, and a buyback policy that mechanically benefits shareholders over time. The market is applying a harsh double penalty: fintech sector out of fashion and slowing growth after the COVID euphoria. The result is an unusually low valuation for the actual quality of the business. The thesis rests on a simple conviction: free cash flow holds, buybacks continue, and the market eventually corrects this anomaly. That is not a guarantee, but it is a clear, numbers-based thesis.
FAQ
What is free cash flow and why does it matter for PayPal?
Free cash flow is the money that genuinely remains in a company's accounts after paying for everything: salaries, investments, taxes. It is harder to manipulate than accounting profit. For PayPal, this figure reaches $4-5 billion per year, demonstrating the real strength of the business regardless of accounting fluctuations.
Why is PayPal stock so cheap today?
The market is applying a double penalty: the fintech sector is "out of fashion" after the 2020-2021 bubble, and PayPal is perceived as a company whose growth has slowed. These two factors combined push the valuation to levels that appear disconnected from the actual quality of the business and its structural free cash flow.
What is P/FCF and how should I interpret it for PayPal?
P/FCF (price-to-free-cash-flow) measures how many years of free cash flow you are paying for when you buy the stock today. At around 8x, PayPal trades at a very low valuation relative to its quality and historical average. For context, tech companies of comparable quality typically trade at 20 to 40 times their free cash flow.
What are the main risks for PayPal?
Apple Pay and Google Pay are gaining share in mobile in-store payments. Klarna and Affirm are attacking the BNPL space. Total Payment Volume growth is slowing. The loss of eBay as an exclusive partner created a gap that has taken time to fill. These risks are real and warrant caution, but they do not fundamentally undermine structural free cash flow as long as the online moat holds.
Is PayPal a good stock to buy in 2026?
This is not investment advice. What I can say: the business quality is high, the valuation is unusually low, and share buybacks create value mechanically over time. The thesis is clear. But competitive risks are real, and any investment decision must remain personal and suited to your own situation.
Voir l'analyse PYPL sur Lubin Investment
About the author
Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I have analyzed stocks through their fundamentals for several years and invest my own money with this method. I codified it into a tool that judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).