PayPal Shares Sink Despite Upbeat Outlook. Is Wall Street Missing the Turnaround?

PayPal Holdings (PYPL -1.39%) shares sank despite the company reporting strong second-quarter results on July 29 and issuing an upbeat outlook, as it continues its efforts to transform its business. The stock in down more than 19% year to date, as of this writing. This raises the question: Is the market missing a turnaround that appears to be happening right in front of its eyes? Let's dig into its second-quarter results to find out. Not the same old PayPal Chief Executive Officer Alex Chriss continues to work to transform PayPal from a simple payment platform into a full-fledged commerce platform. It's doing this both in old-school ways as well as leveraging new technologies such as artificial intelligence (AI). One simple way it is looking to become a full commerce platform is by moving beyond just e-commerce and its digital app. To this end, it has done something decidedly non-tech, issuing new physical credit and debit cards. It added 2 million first-time PayPal and Venmo debit card users in the quarter in the U.S., while increasing monthly active users by 65% and total payment volume (TPV) by 60%. It also launched a new physical card for PayPal Credit in the quarter. That doesn't mean the company isn't innovating on the technology side as well. It says it's working with leading AI companies, including Perplexity, Anthropic, and Salesforce. It also launched PayPal World, a platform that brings together some of the largest digital wallets in the world to let consumers easily connect with any merchant in the world. One of Chriss' other big priorities since taking over has been to focus on profitability rather than low-margin revenue growth. This was an issue with its unbranded checkout business, Braintree, before he took over, and he's been working to set the price based on its value to users. This has caused some churn but has been leading to better earnings growth. For the second quarter, revenue climbed 5% to $8.29 billion, while adjusted earnings per share (EPS) jumped 18% to $1.40. That easily topped the average estimate for adjusted EPS of $1.30 on revenue of $8.08 billion and was a big acceleration in revenue growth from the 1% in the first quarter. Transaction margin dollars, which are the profits it makes from each payment it processes (similar to gross profits), increased 7% to $3.84 billion. This has been one of the most closely watched metrics for the company. TPV rose 6% to $443.5 billion. Online PayPal branded checkout TPV rose 5% on a constant currency basis; while including its offline PayPal and Venmo debit cards, it rose 8%. Its unbranded Braintree TPV edged up 2%. Payment transactions dropped by 5% to 6.2 billion, while payment transactions per active account sank 4% to 58.3 on a trailing-12-month basis. This is largely due to the loss of low-margin Braintree transactions. Excluding third-party platforms that primarily use Braintree, such as Shopify, the number of payment transactions rose 6% and 4% per active account (the higher percentage reflects the exclusion of the 2024 leap day). Active accounts increased by 2% year over year to 438 million. Monthly active accounts also rose 2% to 226 million. The company forecast third-quarter adjusted EPS to be between $1.18 and $1.22, versus the $1.20 average of analyst estimates. It is looking for currency-neutral revenue increase of around 4% and growth in transaction margin dollars of 4% to a range of $3.76 billion to $3.82 billion. For the full year, it increased its adjusted EPS forecast to a range of $5.15 to $5.30, up from an earlier estimate of between $4.95 to $5.10, The new estimate represents 11% to 14% growth. It is looking for an increase in transaction margin dollars of 5% to 6%, to between $15.35 billion and $15.5 billion. Image source: Getty Images. Is it time to buy the dip? PayPal is clearly showing signs of a turnaround, executing on a number of fronts to be a better business. Venmo is producing strong growth, with revenue climbing more than 20%, and Pay with Venmo growth of more than 45%. Meanwhile, it's seeing more users adopt its physical credit and debit cards, and it's increasing its unbranded business' profitability. The company is innovating, and its global wallet initiative looks promising. However, the market is impatient and seems to want more. Investors with a little more patience are getting a solid in-progress turnaround play at a cheap price. The stock trades at a forward price-to-earnings ratio (P/E) of about 14 times 2025 analyst estimates and a 0.9 price/earnings-to-growth (PEG) ratio. Stocks with PEGs below 1 are generally considered undervalued. As such, I'd be a buyer of the stock on this dip, as it clearly seems Wall Street is missing the forest for the trees.