Goldman Sachs Maintains Sell Rating on PayPal; Weak Branded Checkout and Unclear Strategy Put Pressure on Stock Price

Overview

In this earnings review, Goldman Sachs notes that PayPal's latest quarterly results were largely in line with expectations, with some revenue items—such as OVAS—exceeding forecasts, and adjusted EPS also surpassing market expectations by about 6%. However, the stock price performed poorly, which Goldman Sachs attributes to weaker second-quarter guidance and soft signals from the branded checkout business. Branded checkout faced multiple pressures in the second quarter, including lower branded checkout volume, increased revenue deductions, price cuts to incentivize product adoption, and a high base effect from last year’s tax payments and renewals/expansions with key payment partners. On the long-term strategy front, the company outlined three main directions: investing in technology, achieving efficiency gains through $1.5 billion in cost savings, and adopting new operating models. However, Goldman Sachs believes these details are insufficient, especially lacking clear reinvestment targets, making it difficult for the market to fully assess their impact. Overall, investors may enter a wait-and-see mode, awaiting clearer signals of execution improvements.

Core views

Quarterly Financial Performance: PayPal reported revenue of approximately $8.353 billion, exceeding market consensus of about $8.05 billion by roughly 4%. Transaction revenue reached about $7.5 billion (3% above forecast), and OVAS revenue came in at $852 million (7% above forecast). Transaction profit totaled about $3.81 billion (4% above forecast). Non-GAAP operating profit was approximately $1.54 billion (6% above forecast), and adjusted net income was about $1.23 billion, with adjusted EPS at $1.34 (GAAP EPS was $1.21), exceeding expectations by about 6%. Growth in Each Business Line: Branded checkout volume grew by 2% on an FXN basis (vs. market expectation of about 1%); P2P and other consumer businesses grew by 10% (in line with expectations); PSP grew by 11% (8% above forecast); Venmo grew by 13% (12% above forecast). Second-Quarter Guidance and Pressures: The company’s second-quarter TM (transaction margin) and EPS growth significantly slowed down, mainly due to lower branded checkout volume, increased revenue deductions, price cuts to encourage adoption, and the high base effect from last year’s tax payments and renewals with key payment partners. Additionally, management noted in incremental commentary that branded checkout volume in the second quarter was trending toward the lower end of guidance. Although the underlying drivers—such as weaker travel spending—are consistent with credit card network data, they continue to put additional pressure on market sentiment. Long-Term Strategic Assessment: Goldman Sachs finds that the long-term strategic plan lacks sufficient detail, including three key commitments: 1) investing in technology; 2) achieving efficiency gains through $1.5 billion in total cost savings (but without clear reinvestment targets, making it hard for the market to fully evaluate their impact); 3) adopting new operating models to accelerate decision-making speed. Overall, the poor performance of branded checkout combined with unclear strategic direction suggests that investors will remain in a wait-and-see stance, waiting for clearer signs of improvement in the company’s execution.

Analysis framework

Goldman Sachs’ analysis unfolds along three main lines: First, performance breakdown and comparison with expectations: Comparing core metrics such as revenue, transaction profit, operating profit, and EPS against Visible Alpha consensus data item by item, while conducting FXN-based analysis of volume growth in each business line—including branded checkout, P2P, PSP, and Venmo—to determine the actual performance differences between each segment and market expectations. Second, guidance and driver analysis: Focusing on the reasons behind the weaker second-quarter guidance, breaking it down into four specific drivers: lower branded checkout volume, increased revenue deductions, pricing strategies, and the high base effect. This is cross-validated with macroeconomic clues like weaker travel spending and credit card network data. Third, strategic assessment and valuation derivation: Structurally evaluating the company’s long-term strategic plan across three dimensions—investment commitment, cost savings, and operating model—and pointing out the critical shortcoming of lacking reinvestment targets for cost savings. At the valuation level, the 12-month target price is derived using a forward-looking P/E multiple of about 7 times based on Q5-Q8 (the next five to eight quarters) earnings forecasts, and the EPS forecasts for 2026–2028 have been updated according to the latest results, guidance, and macroeconomic context.

Methodology notes

• Valuation MethodPE/PEG valuation

  Valuation Based on Forward P/E Multiple

  Goldman Sachs uses EPS forecasts for Q5-Q8 (the fifth to eighth future quarters) multiplied by a P/E multiple of about 7 times to derive the 12-month target price. This method anchors on future earnings rather than historical earnings, better reflecting market pricing of forward-looking growth expectations. The target price of $40, multiplied by the diluted shares of 834.8 million, minus net debt, yields the implied market capitalization.

• Company Fundamentals and Financial FrameworkEarnings Quality Analysis

  Business Line Breakdown and Expectation Gap Analysis

  Goldman Sachs breaks down PayPal’s revenue into components such as transaction revenue and OVAS, comparing each business line’s volume growth against Visible Alpha consensus item by item to identify the sources of overperformance or underperformance. This approach helps investors pinpoint whether performance drivers come from core or peripheral businesses and whether overperformance is sustainable.

• Event Game Theory and Behavioral FinanceExpectation Gap/Expectation Management

  Impact of Guidance and Incremental Commentary on Market Sentiment

  Goldman Sachs points out that although quarterly results exceeded expectations, the stock price performed poorly because of weaker second-quarter guidance and management’s incremental commentary indicating that branded checkout trends were heading toward the lower end of guidance. This illustrates that market pricing not only looks at realized performance but also at forward-looking guidance and signals conveyed by management’s wording.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• PayPal Holdings (PYPL.US)

  Report directly covers the target asset, with a sell rating

  Strengths

  OVAS business exceeded expectations by 7%; volume growth in each business line exceeded expectations (branded checkout +2%, PSP +11%, Venmo +13%); overall quarterly EPS exceeded expectations by about 6%

  Weaknesses

  Branded checkout trends are heading toward the lower end of guidance; TM and EPS growth significantly slowed down in the second quarter; cost-saving plan lacks reinvestment targets; long-term strategy lacks detailed specifics

  Risks

  Upside risks include improved macroeconomic conditions, higher adoption rates of new products/services, and a better competitive environment

Key data

• Quarterly RevenueApproximately $8.353 billionAbout 4% above market consensus
• Adjusted EPS$1.34GAAP EPS was $1.21, exceeding expectations by about 6%
• Transaction ProfitApproximately $3.81 billionExceeding expectations by 4%
• Non-GAAP Operating ProfitApproximately $1.54 billionExceeding expectations by 6%
• Branded Checkout Volume Growth+2% (on FXN basis)Market expectation was about 1%
• PSP Volume Growth+11% (on FXN basis)Market expectation was about 8%
• Venmo Volume Growth+13% (on FXN basis)Market expectation was about 12%
• 12-Month Target Price$40Lowered from $41, based on a P/E multiple of about 7 times
• 2026/2027/2028 EPS Forecast$5.29/$5.70/$6.07Previous values were $5.31/$5.90/$6.59
• Total Cost-Saving Target$1.5 billionBut lacks reinvestment targets

Impact & implications

Goldman Sachs believes that PayPal’s current challenges stem from the combination of weak branded checkout performance and unclear strategic direction. In the short term, the significant slowdown in TM and EPS growth in the second-quarter guidance reflects ongoing pressure from pricing strategies and the high base effect. In the medium term, although the $1.5 billion cost-saving plan is sizable, the lack of clear reinvestment targets makes it difficult for the market to fully assess its net impact on profitability. Goldman Sachs expects investors to adopt a wait-and-see attitude, waiting for clearer signals of improvement in the company’s execution. The sell rating and target price of $40 imply about a 14% downside potential.

Risks

• Further weakening of the macroeconomic environment could affect consumer payment spending
• Underperformance in the adoption of new products/services
• Deterioration of the competitive environment
• Continued weakness in the branded checkout business

What to watch

• Whether branded checkout volume can stabilize in the second quarter
• Reinvestment targets and execution progress of the $1.5 billion cost-saving plan
• Specific implementation details of the company’s strategic direction
• Trends in TM (transaction margin) and EPS growth going forward