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Legendary investor Michael Burry has opened a 3 and 1/2% position in PayPal yesterday and he's not alone. You have a representative that sits on the House of Financial Services Committee also opening up a $30,000 position in PayPal stock. Meanwhile, PayPal has been absolute disaster. The stock is down 81% over the last year.
It's been really, really bad and the stock is so cheap that it's currently trading at about nine times forward PE. Nine times is really cheap for PayPal. So, in this video I'm going to talk about PayPal, let you know why I believe Michael Burry has bought a position in PayPal. I believe I have a different perspective on PayPal than most investors.
So, I'm really excited to talk about the stock again. Now, the main reason why people hate PayPal is because they believe it's a dying company. But if PayPal is a dying company, then why are active accounts growing about 2 million people every single quarter? It goes from 40 47 429 32 34 36 439 million people have an active account with PayPal.
So, how come is PayPal a dying company? If you look at the transaction volume or payment volume, it has increased almost every single quarter. Does this trend to you look like a dying company? It doesn't look like a dying company to me. If PayPal was a dying company, then why is Venmo growing 20% with 67 million monthly active users?
So, 67 million people use Venmo every single month. How is this a dying company? I I I really don't understand it. But there's two main problems with PayPal that give it a dying company-like characteristics. One of them is a branded checkout online, which is the profit engine for the company. This is by far the most profitable the division.
Poor management, by the way. It only grew 1%. It used to grow 6%. It went to 1% as of Q4 of 2025. Fiscal year in total it was 4% versus 6% and this is again the most profitable segment for PayPal and it's been disappointing, you could say. You could also look at the transaction per active account. It has also declined.
It declined 1%, then 4%, then 6% and the last quarter it declined 5%. Now, you're having bigger and bigger transactions within PayPal, but the transaction per active account, how often people use PayPal, which is a very important metric, it has been declining about 6 to 5% over the last few quarters and this is really not good at all.
And you also have revenue growth plummeting from 20% 18 8% 8% 6% 2025 they only grew 4% in revenues. Now, the good thing with PayPal and normally with every kind of a, you could say, turnaround company, you normally need a catalyst. The biggest and the best catalyst for a turnaround in general is new management or a new CEO.
And this is what you have with PayPal. You have a new CEO. Now, we had a new CEO like a year and a half ago. He said he's going to shock the world. He only shocked investors. He shocked me personally and he hasn't really shocked the world because the stock went down crazy after he after he went in and he didn't do good work.
I mean, he did a few good things, you know, but but in general he he wasn't really the best. So, they got rid of him. They got a new CEO. His name is Enrique Lores. I believe that's how you pronounce his name. And he seems to be promising. He was the CEO of HP and HP was just a company that used to sell PCs and printing supplies, but he expanded HP into subscriptions, future of work such as AI offerings and actually HP right now is more of an AI-related infrastructure kind of bet.
And it has really he has really transformed the company. Dell also is an infrastructure story, but HP is getting into it. So, he has really transformed HP. Now, he's the CEO of PayPal. He has a good track record. So, we're going to see what happens and this is a major, major catalyst. Once you have a new CEO, you have a new face for the company, but generally speaking, the first quarter is normally like a quarter where they downgrade guidance for him to beat on low expectations.
This is what most new CEOs do. But in terms of the guidance that was set by the previous CEO, I think it's disappointing enough. I don't know if it could be even more disappointing. He was expecting transaction margin to slightly decline. He's expecting non-GAAP earnings per share to grow to grow low single digits or low single digits decline to slightly positive.
So, it's pretty much going to be negative. And adjusted free cash flow of about $6 billion. So, pretty much no growth in 2026. Now, if we look at the share repurchases for PayPal they're expecting to repurchase $6 billion worth of stock, which means the company is planning to deploy 100% of their free cash flow on buybacks.
But PayPal has about a billion dollars in stock-based compensation. So, we have to take out stock-based compensation. And by the way, I'm using fiscal.ai to come up with this chart and all those charts. If you want to try it out, they'll give you two weeks of free access if you use my link in the description.
But we have to take out the billion dollar in stock-based compensation. If we take it out, this is about a $5 billion buyback that really affects the numbers of shares outstanding. Now, $5 billion, let's say, in total free cash flow is about an 11% free cash flow yield on a $44 billion market cap. So, if PayPal doesn't grow, it doesn't do anything.
And if it's, let's say, distributes 100% of its free cash flow as a dividend, you're going to get an 11% dividend yield every single year as an investor. Now, it's good that PayPal is not doing dividends and they're doing buybacks. This is what they should be doing. But this is how cheap the stock is.
What if they had to redistributed as a dividend, you would get an 11% dividend yield. And it's really, really cheap. And the reason why it's cheap is again because it's not growing as uh fast and those kind of stocks trade at a lower multiple. Now, the shares outstanding have been going down. They've been deploying a lot on buybacks and I think this is what the company should be doing when the stock is trading at down 85% over the last five years and it's trading at about nine PE ratio, which I believe is very, very low.
Now, in terms of my valuation model, the way I think of PayPal is I look at the revenue growth. It's going to grow like 3% this year. It's expected to go back to 4 5%. So, let's say 4% revenue growth on average. If we get no multiple expansion, no multiple contraction, no margin expansion and we assume that free cash flow grows in line with revenues, I get an 11% current free cash flow yield after stock-based compensation and we add in 4% of growth, I get about a 15% annual return on the worst-case scenario, which is a double every five years.
But again, that doesn't really include, you could say, multiple expansion, which is very possible when you have a stock trading at nine times earnings. It doesn't include a margin expansion, which is possible if the CEO expands Venmo. Venmo is profitable also and he expands in more and more things and buy now, pay later if he expands it a little bit more.
So, there's a lot of positive things for PayPal. On any worst-case scenario, I'm seeing it double over the next five years. But my main bet, which I don't believe is a consensus bet, is that PayPal will most likely get acquired. And I said it in my last video before the acquisition rumor came out and a lot of people commented on my video and they told me, "You called it.
You said it's going to might get acquired." And there was rumors that it's going to get acquired. Now, when I look at PayPal, it has a 44% market share in electronic payments. Pay- PayPal is very is a household name. Everyone knows PayPal. They have used it maybe once in a while. Maybe they don't like it, but they have used it.
They know the name. They have million like a few hundred million in in in active accounts and they just they're really well-known. And they have a 44% market share trading at an 11% free cash flow yield or nine times earnings. I think there could be a lot of interesting buyers, especially with the current administration, which is really friendly in terms of mergers and acquisition.
Now, if you had Lina Khan back then, which which she didn't even let Amazon acquire iRobot, I would say it would never get acquired. But now you have a very friendly administration in terms of acquisitions and mergers in general. So, I would not be surprised if maybe Amazon acquires PayPal or if maybe Shopify acquires PayPal.
Maybe not Shopify, but either Amazon, could be Apple. It could be some some of those big conglomerates because PayPal could be really useful. And even if they pay a 15 20% premium to their current market cap, it's they're still getting a good deal. So, if I had to bet, I would bet that PayPal would most likely get acquired, maybe this year, maybe next year.
But if it doesn't get acquired, I see at least a 15% annual return. I highly doubt that the situation is going to get even worse than where how it is right now with the current guidance. I think the worst is likely priced in and I believe the stock's undervalued and I think it will most likely get acquired.
So, I'm personally looking for call options on the stock where if I'm right, I mean, I could really bet big on it without risking too much and if I'm wrong, I won't lose a lot. So, sometimes I play them with call options and I share everything I do in my group and I teach you options and everything in my group and this is the link if you're interested.
But thank you again for watching. It was not financial advice. Hope you enjoyed it. If you did enjoy it, please press the like button and maybe consider subscribing. So, I'll talk to you in another video.
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