PayPal Returns to a Fundamentals and Cost-Improvement Thesis After Stripe and Advent Abandon Acquisition

Overview

This report analyzes the valuation dynamics following Stripe and Advent's decision to abandon their acquisition of PayPal, the fundamental support and structural challenges facing PayPal as an independent company, and the impact of the deal's termination on the competitive landscape of the payments industry. Bernstein believes PayPal's operating trends have improved slightly from earlier levels, but the improvement has largely benefited from a recovery in U.S. e-commerce and is not yet sufficient to change its Market-Perform rating.

Core views

Stripe and Advent have abandoned their proposed acquisition of PayPal, and PayPal shares fell 15% after the news was announced. Bernstein believes the main reason the deal failed to proceed was likely a pricing impasse: when the initial US$60.5 offer was made, valuations for PayPal and the fintech sector were near historical lows; PayPal management was unlikely to accept a price that was not significantly above US$70, while questions persisted over whether Stripe and Advent could substantially increase their US$60.5 offer. Meanwhile, Stripe's US$7.5 billion acquisition of OpenRouter, an AI model gateway and routing platform, also forms part of the context for its capital allocation. The termination of the deal may provide relief to other participants in the payments ecosystem. The report had previously argued that the scale and market power of a combined Stripe and PayPal would be sufficient to reshape global payments competition. Therefore, the failure to complete the transaction generally benefits companies such as Adyen, Visa, Mastercard, Affirm, and Klarna by preventing them from facing a more powerful integrated competitor. The industry impact here does not mean that these companies' operating outlooks have independently improved, but rather that the risk of a dramatic change in the potential competitive landscape has declined. For PayPal itself, Bernstein believes the unaffected share price of US$48 before the deal rumors should not simply be used as the valuation anchor following the deal's collapse. Since the June lows, most fintech stocks that have not experienced earnings missteps have risen by 20% to 30%; e-commerce activity appears to have accelerated, PayPal exceeded expectations in its most important branded checkout volume metric in the second quarter, and the company said its European metrics remained stable, despite Klarna facing difficulties in Germany. Based on the sector's valuation recovery and improving operating trends, the report estimates that PayPal shares could trade in the low-to-mid US$50s even without an acquisition premium. PayPal's product metrics have also improved. Its BNPL business grew 26% year over year, although the report cautions that not all of this represents incremental business; PayPal secured Amazon partnerships in Germany and Austria, providing an entry point for re-entering the Amazon ecosystem. For Venmo, Pay with Venmo grew 44%, monthly active accounts for the Venmo debit card increased by more than 50%, and Venmo's overall monthly active accounts grew by approximately 30%. These figures indicate some improvement in the underlying business, although Bernstein believes the primary driver remains the broader recovery in the U.S. e-commerce market rather than a fundamental reversal in PayPal's structural competitive position. Cash flow and asset quality provide what the report describes as downside support for the share price. PayPal has a 13% free cash flow yield, unique assets including Venmo, and a solid balance sheet, while previous interest from strategic buyers demonstrates that its assets have potential transaction value. Because PayPal is too large for most strategic buyers to fund an acquisition independently, it is unclear whether another offer will emerge in the near term. However, if the share price remains depressed, Bernstein cannot rule out a transaction jointly backed by multiple private equity sponsors or an approach based on sum-of-the-parts valuation and asset separation. This support does not eliminate PayPal's structural problems. Branded checkout is the company's cash cow, but it is being squeezed by multiple competitive forces, and the revenue growth outlook remains uncertain. Meanwhile, the company's cost structure is bloated, and management has identified multiple paths to more than US$1.5 billion in annualized gross cost savings. The savings could be reinvested in the business to improve its currently weak consumer value proposition and consumers' propensity to choose PayPal; the company also needs to implement a series of product improvements. Venmo remains significantly under-monetized, although conditions are improving; agentic payments provide some optionality, but the report believes this prospect remains distant. Bernstein maintains Market-Perform ratings on PayPal and Klarna and assigns Outperform ratings to Visa, Mastercard, Adyen, Block, and Affirm. As of August 27, 2026, PayPal closed at US$61.47 with a target price of US$55.00; Klarna was at US$14.01 with a target price of US$16.00; Block was at US$84.85 with a target price of US$95.00; Mastercard was at US$591.73 with a target price of US$710.00; Visa was at US$379.66 with a target price of US$450.00; and Affirm was at US$77.49 with a target price of US$110.00. Adyen's U.S. quotation was US$12.59 with a target price of US$18.63, while its Amsterdam-listed security was quoted at €1,079.60 with a target price of €1,600.00. PayPal's adjusted earnings per share were US$5.31 in 2025, an estimated US$5.37 in 2026, and an estimated US$5.67 in 2027, corresponding to adjusted P/E ratios of 11.6x, 11.5x, and 10.8x, respectively.

Analysis framework

The report first analyzes why the deal failed by examining the initial US$60.5 offer, management's likely demand for a price significantly above US$70, and the buyers' ability to pay. It then estimates PayPal's valuation range without a transaction using the unaffected price of US$48, the fintech sector's performance since its June lows, and PayPal's recent operating metrics. It subsequently assesses downside support through the free cash flow yield, balance sheet, potential cost savings, and product metrics, while testing whether that support is sufficient to change the rating by considering competition in branded checkout, revenue uncertainty, and execution requirements. Finally, it analyzes the competitive impact of the deal's termination on other payments companies.

Methodology notes

• Event Game Theory and Behavioral FinanceEvent-driven analysis

  Event scenario analysis following acquisition termination

  The report compares the transaction offer, the unaffected share price, and the operating environment following the deal's termination to assess the fundamental valuation range to which PayPal may revert after the acquisition premium disappears, as well as the impact on industry competition.

• Corporate Fundamentals and Financial FrameworksFree cash flow analysis

  Free cash flow yield and share-price support

  The report uses PayPal's 13% free cash flow yield, sustained cash generation, and solid balance sheet to explain why the company retains some downside valuation support despite structural pressures.

• Valuation methodsSOTP Valuation

  Potential sum-of-the-parts valuation or asset-separation plan

  The report does not use this method to calculate its target price, but notes that if PayPal's share price remains depressed, sum-of-the-parts valuation or asset separation could become a potential transaction path.

• Valuation methodsP/E and PEG Valuation

  Price-to-earnings valuation

  The coverage table presents PayPal's valuation using adjusted P/E ratios and evaluates Affirm using the report's P/E methodology; PayPal's adjusted P/E ratios for 2025 through 2027 are 11.6x, 11.5x, and 10.8x, respectively.

• (Method Outside the Vocabulary)

  EV/EBIT and EV/adjusted EBIT valuation

  The coverage table evaluates Block using EV/EBIT and Klarna using EV/adjusted EBIT, comparing relevant payments and fintech companies based on enterprise value multiples relative to operating profit.

Asset mapping & comparison

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

• PayPal (PYPL)

  Following the deal's termination, its valuation will once again be determined by its independent operating performance, cash flow, and potential strategic value.

  Strengths

  A 13% free cash flow yield, a solid balance sheet, unique assets such as Venmo, and improving BNPL and Venmo metrics.

  Weaknesses

  Its branded checkout cash cow is being squeezed by competition, the consumer value proposition is weak, the revenue outlook is uncertain, and Venmo remains insufficiently monetized.

  Comparison

  Rated Market-Perform; closing price US$61.47 on August 27, 2026, with a target price of US$55.00.

  Risks

  A weakening e-commerce recovery, inadequate execution on cost reductions and product improvements, or intensifying competition in branded checkout.

• Adyen (ADYEY, ADYEN.NA)

  The failure of Stripe and PayPal to merge reduces the risk that it will face a very large integrated payments competitor.

  Strengths

  The report assigns an Outperform rating.

  Comparison

  U.S. quotation US$12.59 with a target price of US$18.63; Amsterdam quotation €1,079.60 with a target price of €1,600.00.

• Visa (V) and Mastercard (MA)

  The termination of the deal eases pressure from the possibility that a Stripe-PayPal combination could reshape the global payments competitive landscape.

  Strengths

  Both companies are rated Outperform.

  Comparison

  Visa closing price US$379.66 with a target price of US$450.00; Mastercard closing price US$591.73 with a target price of US$710.00.

• Block (XYZ)

  The potential combined Stripe-PayPal entity will no longer be formed, reducing the risk of a dramatic change in the competitive landscape.

  Strengths

  The report assigns an Outperform rating.

  Comparison

  Closing price US$84.85 with a target price of US$95.00; valuation methodology is EV/EBIT.

• Affirm (AFRM)

  The termination of the deal allows it to avoid facing a larger integrated payments and fintech competitor.

  Strengths

  The report assigns an Outperform rating.

  Comparison

  Closing price US$77.49 with a target price of US$110.00; the valuation uses the report's earnings-per-share and P/E methodology, with 2026 as the base year.

• Klarna (KLAR)

  The termination of the deal eases potential competitive pressure, although the report also notes that it is facing difficulties in Germany.

  Strengths

  Avoids the formation of a more powerful combined competitor in Stripe and PayPal.

  Weaknesses

  The report mentions its difficulties in Germany.

  Comparison

  Rated Market-Perform; closing price US$14.01 with a target price of US$16.00; valuation methodology is EV/adjusted EBIT.

  Risks

  Pressure on its German business.

Key data

• Immediate reaction in PayPal sharesDown 15%Performance cited in the report after the announcement that Stripe and Advent had abandoned the acquisition
• Initial acquisition offerUS$60.5Initial offer from Stripe and Advent
• Price threshold PayPal might acceptSignificantly above US$70Bernstein's assessment of management's position
• Stripe's acquisition price for OpenRouterUS$7.5 billionOpenRouter is an AI model gateway and routing platform
• Unaffected share price before deal rumorsUS$48Reference point used by the report to discuss the disappearance of the transaction premium
• Fintech sector reboundUp 20% to 30% from June lowsRefers to most fintech companies that did not experience earnings missteps
• Estimated PayPal range without a transaction premiumLow-to-mid US$50sBernstein's assessment based on the sector recovery and business improvement
• BNPL growthUp 26% year over yearThe report notes that not all of the growth represents incremental business
• Pay with Venmo growth44%Improved usage of Venmo payments
• Growth in monthly active Venmo debit card accountsMore than 50%Venmo monetization-related metric
• Growth in Venmo monthly active accountsApproximately 30%Overall Venmo user engagement metric
• Free cash flow yield13%The report views this as a factor supporting PayPal's share price
• Path to annualized gross cost savingsMore than US$1.5 billionMultiple cost-reduction paths identified by PayPal
• PayPal rating and priceMarket-Perform; closing price US$61.47; target price US$55.00Closing price as of August 27, 2026
• PayPal adjusted earnings per shareUS$5.31 in 2025; estimated US$5.37 in 2026; estimated US$5.67 in 2027Earnings measure listed in the coverage table
• PayPal adjusted P/E ratio11.6x in 2025; 11.5x in 2026; 10.8x in 2027Annual valuations corresponding to the coverage table
• Ratings for other covered companiesVisa, Mastercard, Adyen, Block, and Affirm are rated Outperform; Klarna is rated Market-PerformCurrent ratings explicitly listed in the report

Impact & implications

The report believes the termination of the deal eliminated PayPal's near-term acquisition premium while also reducing the competitive pressure other payments companies would have faced from a combined Stripe and PayPal. PayPal must now rely on the e-commerce environment, cost savings, product improvements, and Venmo monetization to support its value. Free cash flow and asset quality can provide downside support, but structural competition in branded checkout keeps the rating neutral.

Risks

• PayPal's branded checkout business, its primary cash cow, is being squeezed by multiple competitive forces.
• The revenue growth outlook remains uncertain, and recent improvement depends to a significant extent on the broader recovery in the U.S. e-commerce market.
• More than US$1.5 billion in cost savings, reinvestment of funds, and product improvements all carry execution requirements.
• BNPL grew 26% year over year, but the report notes that not all of this represents incremental business.
• Venmo remains significantly under-monetized, although related trends are improving.
• Agentic payments optionality remains distant and is not yet sufficient to serve as a dependable growth pillar.
• PayPal's large scale limits the number of strategic buyers capable of independently making an acquisition offer.

What to watch

• Whether a new strategic buyer or a joint bid from multiple private equity sponsors emerges in the near term.
• Whether PayPal can deliver more than US$1.5 billion in annualized gross cost savings and effectively reinvest the funds in the business.
• Whether branded checkout volume can continue improving after exceeding expectations in the second quarter.
• Whether the U.S. e-commerce recovery and PayPal's stable metrics in Europe can continue.
• The incremental contribution from BNPL growth and subsequent progress in the Amazon partnerships in Germany and Austria.
• Whether growth in Venmo payments, active debit card accounts, and overall monthly active accounts can translate into higher monetization.
• Whether improvements in the consumer value proposition and product experience can increase consumers' willingness to choose PayPal.