PayPal is at a strategic crossroads; the key for 2Q26 is whether management signals a sale or transformation
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PayPal is at a strategic crossroads; the key for 2Q26 is whether management signals a sale or transformation
Morgan Stanley maintains Underweight and a $34 target price on PYPL, believing that rumored potential acquisition interest from Stripe/Advent may be a more credible path to unlocking value, while standalone operations still face share loss, technical debt, and competitive pressure.
- Investors are most focused on what management will say in the July 28 2Q results about strategic options, a potential sale, and the direction under new CEO Enrique Lores.
- The report expects online Branded Checkout growth of about 1-2% in 2Q; Venmo may offset weakness in the core button, but growth may be driven by short-term rewards, making sustainability questionable.
- Venmo posted net merchant adds of only 1 in 2Q, with 8 additions and 7 losses, bringing total merchants to 89; acceptance was 19% by count and 8% by volume excluding Amazon, both flat versus 1Q.
- PayPal still maintains a lead in acceptance, at 84% by count in 2Q and 87% by volume excluding Amazon, but churn trends need continued monitoring.
- The $34 target price is based on about 7x CY27 SBC-burdened EPS; versus the current price of $56, this implies about 39.3% downside.
Report interpretation
Overview
This report is Morgan Stanley's preview of PayPal Holdings, Inc. ahead of its 2Q26 earnings release. The core view is that PayPal is now at a strategic crossroads: compared with continuing to pursue a standalone transformation, a potential acquisition proposal from Stripe/Advent, if real, could offer a clearer path to value realization. The report argues that the company faces limited strategic options as a standalone business, with pressure mainly coming from digital wallet competition, technical debt, a rising mix of lower-value processing business, a mature user base, and weak Branded Checkout growth.
Core views
The report maintains a negative relative view on PYPL. The authors believe investors will focus on whether management signals a sale of all or part of the business, or a continued push to transform as an independent company, in the 2Q results. The report argues that reversing share loss as a standalone company may require redirecting capital from buybacks toward Branded Checkout modernization, integration with hardware wallets such as Apple Pay, expanding Venmo acceptance, and preparing for agentic commerce, which could pressure EPS growth over the coming years. Although the e-commerce environment has improved slightly and Venmo checkout may help Branded Checkout in the short term, signs of merchant churn and weak conversion make its sustainability questionable.
Analysis framework
The report analyzes potential management commentary ahead of 2Q earnings, market rumors, valuation multiples, Morgan Stanley ModelWare forecasts, Refinitiv consensus, U.S. non-store retail sales data, merchant acceptance tracking, risk-reward scenarios, and peer valuation comparisons. The valuation framework uses a CY27 adjusted EPS multiple, mapping base, bull, and bear cases to different target prices.
Methodology notes
Valuation based on 2027 adjusted EPS multiple
The base target price is based on about 7x Morgan Stanley's estimate of CY27 SBC-burdened adjusted EPS, which the report views as reasonable relative to payment processing peers on a growth-adjusted basis.
Target prices under bull, base, and bear scenarios
The report presents a scenario framework of $79 in the bull case, $34 in the base case, and $16 in the bear case, corresponding respectively to faster e-commerce growth and Venmo traction, gradual share loss, and macro slowdown with faster Branded deterioration.
Tracking digital wallet merchant acceptance and churn
Merchant additions, losses, acceptance share, and payment volume share are used to observe merchant stickiness and conversion effectiveness for wallets such as PayPal, Venmo, Shop Pay, Amazon Pay, and Google Pay.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- PayPal Holdings, Inc. (PYPL.O / PYPL US)Covered company
- Strengths
- It still has high online merchant acceptance, with PayPal at 84% acceptance by count and 87% by volume excluding Amazon; the e-commerce environment also improved in 2Q.
- Weaknesses
- Branded Checkout growth is weak, technical debt and integration complexity are high, competition is causing share loss and pricing pressure, and a standalone transformation may require higher investment that suppresses EPS.
- Comparison
- Compared with Shop Pay, PayPal is larger in scale, but Shop Pay's churn has improved and its two-year average churn rate fell below PayPal's for the first time; compared with processors such as FISV and GPN, the rumored acquisition valuation of about 10x consensus 2027 adjusted EPS is viewed by investors as attractive.
- Risks
- The acquisition does not materialize, management continues heavy buybacks instead of investing, Branded growth turns negative, Venmo reward-driven growth proves unsustainable, and agentic commerce creates new pressure.
- VenmoPayPal's digital wallet and a checkout growth lever
- Strengths
- It may help offset weakness in the core Branded checkout button in 2Q and provide short-term growth improvement.
- Weaknesses
- Merchant churn is high; in 2Q it added 8 merchants but lost 7, and acceptance share did not improve; growth may be driven mainly by rewards and incentives.
- Comparison
- Venmo's merchant churn is higher than PayPal's main button and also weaker than Shop Pay's lower-churn performance.
- Risks
- Growth slows after rewards are removed, and merchants remove the button because they believe conversion contribution is insufficient.
- Potential Stripe / Advent transactionPossible path to strategic value realization
- Strengths
- If confirmed, the transaction could provide a more credible path to realizing value for PayPal than a standalone transformation.
- Weaknesses
- The reports have not been confirmed by either side, and PayPal's board reportedly rejected the initial offer and wants a higher price.
- Comparison
- The initial rumored offer price of $60.50 implies about 10x consensus 2027 adjusted EPS and about 11.5x Morgan Stanley's forecast 2027 adjusted EPS.
- Risks
- Stripe may be price-sensitive, and rumors of its acquisition of OpenRouter could weaken market confidence that a PayPal deal will advance.
Key data
- RatingUnderweightMorgan Stanley's stock rating on PYPL.
- Target price$34.00The report's base-case target price.
- Current share price$56.00July 23 closing price.
- Implied upside/downside-39.3%Calculated from the $34.00 target price and the $56.00 current share price.
- Expected 2Q growth for Branded Checkoutabout 1-2%Venmo may partially offset weakness in the core Branded checkout button.
- U.S. non-store retail salesApril/May +11%, June +18%1Q was +10%; June may have been affected by Amazon Prime Day timing.
- Venmo merchant changes8 additions, 7 losses, net add of 1 in 2QTotal merchant count reached 89.
- Venmo acceptance share19% by count, 8% by volume excluding AmazonBoth were flat versus 1Q25.
- PayPal acceptance share84% by count, 87% by volume excluding AmazonNet merchant adds were 1 in 2Q, and volume share fell from 88% in 1Q to 87%.
- Scenario target pricesBull $79; Base $34; Bear $16These correspond to a 2027 EPS-related multiple framework of 12x, about 6.5x/7x, and 4.5x, respectively.
Impact & implications
The report's investment implication is negative: if management does not provide a credible path toward a sale or strategic reset, the market may continue to focus on PayPal's structural challenges in core checkout, Venmo monetization, and Braintree/PSP economics. Potential acquisition rumors may support short-term sentiment, but if Stripe turns to other assets or does not raise its offer, uncertainty around the deal path would increase. A standalone transformation aimed at improving long-term competitiveness may require sacrificing buybacks and near-term EPS.
Risks
- Management does not provide a clear strategic signal, leaving investors lacking confidence in the standalone transformation path.
- Branded Checkout continues to lose share or its growth turns negative, accompanied by pricing pressure.
- Venmo checkout growth depends on short-term rewards and may prove unsustainable once incentives weaken.
- Rising merchant churn indicates the payment button may not be materially improving conversion.
- Catching up in technology and product capability may require higher marketing, rewards, and R&D spending, compressing margins and EPS.
- Stripe/Advent acquisition rumors cannot be confirmed, the offer is not raised, or the deal path is interrupted.
- Competitors such as Apple Pay, Shop Pay, Adyen, and SHOP continue to strengthen payment and checkout experiences.
- Agentic commerce could become a new structural pressure.
What to watch
- Management commentary on a sale, breakup, or standalone transformation in the July 28 2Q26 earnings release.
- How new CEO Enrique Lores and the board describe strategic choices and capital allocation.
- Whether actual 2Q Branded Checkout growth falls within the roughly 1-2% range.
- Whether Venmo checkout growth comes from real conversion improvement rather than short-term rewards.
- Changes in merchant additions, losses, acceptance share, and payment volume share for Venmo and PayPal.
- Whether PayPal shifts capital from buybacks toward Branded Checkout modernization, hardware wallet integration, and platform upgrades.
- Whether Stripe continues to pursue a PayPal-related transaction or turns to other assets such as OpenRouter.
- Whether EPS, transaction profit dollars, and operating expense guidance for FY26 and beyond are revised downward.