Goldman Warns PayPal 2026: 1% Growth, CEO Exit, Margin Decline

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Operating Performance

Branded Checkout Underperformance

The branded checkout segment grew only 1% on a foreign exchange neutral basis, materially below street expectations of approximately 2.3%. This represents a continuation of the deceleration trend that has concerned investors over the past several quarters. The weakness in branded checkout is particularly troubling as it represents PayPal's core competitive moat and highest-margin business segment.

Transaction revenue came in 2% below consensus at $7.819bn, while transaction margin came in 1% below consensus at $4.034bn. The transaction margin percentage of 46.5% was up 51 basis points quarter-over-quarter but down 54 basis points year-over-year, reflecting ongoing competitive pressures in the payments ecosystem.

Relative Strength in Other Segments

While branded checkout disappointed, other business segments showed more resilient growth. P2P and Other Consumer volume grew 10% on a foreign exchange neutral basis, slightly ahead of street expectations of 9.5%. Payment Service Provider (PSP) volume grew 8%, roughly in line with expectations.

Venmo, PayPal's peer-to-peer payment platform, demonstrated strong growth with volume up 13% year-over-year on a foreign exchange neutral basis, exceeding street expectations of 12%. This outperformance suggests that PayPal's newer products continue to resonate with consumers, even as the core branded checkout business struggles.

Financial Performance

Revenue and Expenses

Total revenue of $8.676bn came in 1% below consensus, with the miss driven primarily by transaction revenue. Other Value Added Services (OVAS) revenue came in 2% above consensus at $857mn, partially offsetting the transaction revenue shortfall.

Non-GAAP operating expenses excluding transaction expense came in at $2.484bn, roughly in line with expectations. However, the company's guidance for 3% operating expense growth in FY26 suggests limited ability to drive margin expansion through cost controls, particularly concerning given the tepid top-line outlook.

Profitability Metrics

Adjusted net income came in at $1.155bn, resulting in an adjusted EPS of $1.23, roughly 5% below consensus. GAAP EPS came in at $1.53, ahead of expectations, but this included one-time benefits that mask the underlying operational challenges.

The transaction margin percentage of 46.5% remains under pressure from increased competition and the shift in mix toward lower-margin PSP and Venmo transactions. While the company has historically been able to offset volume pressure with pricing actions, the current competitive environment makes further take-rate expansion challenging.

FY26 Guidance Analysis

The company's FY26 guidance represents a significant disappointment and suggests that management sees limited near-term catalysts for reacceleration. Non-GAAP EPS growth of low single digit decline to slightly positive compares unfavorably to consensus expectations of approximately 9% growth.

Key elements of the FY26 guidance include transaction margin dollars expected to decline slightly (roughly flat excluding interest income), operating expenses growing approximately 3%, and free cash flow in the $6bn+ range. The guidance for roughly flat total payment volume growth suggests that management sees continued headwinds in branded checkout offsetting growth in other segments.

"The pace of change and execution was not in line with the board's expectations."

Strategic Implications

The CEO transition announcement adds another layer of uncertainty to an already challenging situation. The board's statement that execution was not in line with expectations suggests potential strategic shifts may be forthcoming. Investors will be closely watching for signals about how the new management team plans to address the ongoing share loss in branded checkout.

Strategic options that may be under consideration include accelerating investment in checkout acceleration initiatives, pursuing partnerships to expand distribution, potential divestitures of non-core assets, or more aggressive cost reduction measures. However, any strategic pivot will take time to implement and show results, creating a prolonged period of uncertainty.

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Investment Conclusion

The combination of weaker-than-expected results, CEO transition, and disappointing FY26 guidance all point to continued challenges for PayPal. The minimal growth in transaction margin dollars is likely to drive further multiple compression, as companies in our coverage universe with similar growth characteristics trade at mid-single digit EPS multiples.

While shares were already trading at what appeared to be inexpensive valuations, we believe the market is correctly pricing in concerns about sustained share loss in the branded checkout business. The company faces fundamental headwinds from the shift toward alternative payment methods, increased competition from both traditional players and fintech upstarts, and declining engagement metrics as measured by transactions per active account.

Our $64 price target is based on approximately 11x P/E multiple on our forward estimates, which we believe appropriately reflects the company's challenged growth profile and execution uncertainty. We maintain our Sell rating and expect shares to remain under pressure until management can demonstrate a credible path to reaccelerating branded checkout growth.

Key questions for the upcoming earnings call include how the strategy around branded checkout acceleration is likely to change under new management, what strategic options the company is considering, what avenues management sees to reaccelerate total payment volume, and whether there are opportunities to reduce expenses given the pressure on the top line.