PayPal’s Turnaround Finds Discipline but Not Yet a Growth Engine

Adjusted EPS rose 8% and full-year guidance moved higher, but revenue grew only 2%, and buybacks, cost cuts and lower credit losses did most of the work behind PayPal’s third-quarter beat.

Key Takeaways

• Revenue rose 2% to $8.58 billion, missing the $8.71 billion consensus. Adjusted EPS of $1.45 beat the $1.31 estimate as diluted shares fell 10.6% and operating costs rose just 1%.
• Transaction margin dollars grew 2% to $3.95 billion. A $97 million drop in transaction and credit losses, aided by a reserve release, accounted for more than the entire gain.
• PayPal raised 2026 adjusted EPS guidance to about $5.60 from $5.38 and expects at least $6.5 billion of adjusted free cash flow. It also plans heavier investment and similar EPS growth in 2027.

The Quality of the Beat

When PayPal’s board removed Alex Chriss in February, it said the pace of change and execution had fallen short of its expectations. Nearly eight months into Enrique Lores’s tenure, the execution is visible; the growth is not yet. Third-quarter adjusted earnings per share rose 8% to $1.45, well ahead of the $1.31 consensus, while non-transaction operating expenses grew just 1%. Revenue was the weak line. Net revenue rose 2% to $8.58 billion, or 1% on a currency-neutral basis, short of the $8.71 billion analysts expected. That was the slowest growth of the year, after 7% in the first quarter and 5% in the second. Under GAAP, operating income fell 8% to $1.40 billion and diluted EPS declined 4% to $1.25. Restructuring and other charges of $255 million, up from $69 million a year earlier, weighed on both.

The figure that defines the quarter sits one line above earnings per share. Adjusted net income fell 3% to $1.245 billion. Per-share earnings rose because there are fewer shares. The diluted count averaged 858 million, down from 960 million a year earlier, after PayPal repurchased about 28 million shares for $1.5 billion in the quarter and roughly 117 million for $6.0 billion over twelve months. At about ten times earnings, buying back stock is a rational use of a formidable cash engine. It is, however, a financial outcome rather than an operating one, and it cannot indefinitely stand in for a business that grows its profits.

A Margin Made by Lower Losses

Transaction margin dollars, the gross profit measure management calls its North Star, rose 2% to $3.95 billion. Excluding interest on customer balances, they rose 3% to $3.66 billion. The arithmetic beneath that headline is instructive. Revenue added $167 million year on year, but transaction expense rose $185 million and absorbed all of it. That happened even as the expense rate improved to 0.87% of volume from 0.89%. The growth came from risk. Transaction and credit losses fell $97 million to $386 million, and the loss rate eased to 0.08% from 0.11%. Chief Financial and Operating Officer Jamie Miller credited stronger onboarding and fraud prevention. She also cited a credit reserve release linked to the expected transfer of receivables to outside funding partners.

Better risk management is a genuine achievement, but a reserve release is not a recurring source of profit. Other signals point the same way. Interest earned on customer balances fell to $289 million from $321 million as rates declined, removing a tailwind that had flattered recent results. Pricing is also under strain. Total payment volume grew 6% to $487.1 billion while transaction revenue rose 3% to $7.71 billion, narrowing the transaction take rate to roughly 1.58% from 1.64%. Management attributes part of that compression to deliberate incentives for branded checkout and buy now, pay later. The test is whether that spending buys lasting share or merely rents volume.

The Button and the Businesses Around It

The PayPal checkout button remains the company’s most profitable franchise and its most persistent difficulty. Branded checkout volume grew between 1% and 2% for a fourth consecutive quarter. The United States improved for a third straight quarter and Germany stabilized. Europe as a whole weighed on results after the European Union removed its de minimis customs exemption for low-value parcels. That change cost about 70 basis points of global branded growth, and management expects the drag to persist through the fourth quarter. The geographic divide is stark: U.S. revenue rose 5%, while international revenue fell 2% as reported and 4% on a currency-neutral basis. Active accounts edged up 0.6% to 440 million.

The growth is coming from businesses that once sat at the margins of the story:

• Braintree: volume rose 10%, and the share of processing relationships carrying value-added services increased to 6% from 5%.
• Venmo: volume grew at a double-digit rate for an eighth consecutive quarter. Its debit card reached 6.7 million monthly active accounts, up more than 55%, and Pay with Venmo volume rose 43%.
• Pay Later: volume grew 25%, and the product won distribution through Amazon in Germany and Austria.

Lores said financial services will contribute more than 20% of transaction margin dollars this year, yet only 23% of Venmo customers use them. He presents that gap as the company’s clearest monetization opportunity. It is also the most credible growth case PayPal currently offers.

A Leaner Company Prepares for AI Shoppers

Much of the quarter’s discipline flows from the reorganization announced on April 29. It consolidated PayPal into three businesses: Checkout Solutions and PayPal, Consumer Financial Services and Venmo, and Payment Services and Crypto. Headcount has fallen by more than 2,000, three organizational layers have been removed across most functions, and management roles have been cut by more than a quarter. The company reiterated a target of at least $1.5 billion in gross annualized run-rate savings over two to three years. It now expects to exit 2026 above $700 million. Technology is carrying part of the load. AI chat agents have resolved more than 24 million customer contacts this year, and 7.5 billion customer records moved to cloud infrastructure during the quarter.

Lores is also preparing PayPal for purchases initiated by software rather than people. On September 22, the company said its customers could shop and pay through Muse, the personal AI agent Meta introduced on September 8. Muse launched with Stripe’s Link as its first payment option. Lores argues that the qualities that made PayPal indispensable in early e-commerce matter more when an agent completes the transaction. Those qualities are verified identity, buyer protection and fraud control. The reasoning holds, but the economics are distant. PayPal executives have said agentic payments should become meaningful from 2028.

The Price of Patience

Guidance moved higher. PayPal now expects 2026 adjusted EPS of about $5.60, up from about $5.38, implying growth of roughly 5% over last year’s $5.31. Transaction margin dollars should reach about $15.7 billion, modestly above the $15.5 billion reported for 2025. The company expects adjusted free cash flow of at least $6.5 billion and about $6 billion of buybacks. Fourth-quarter adjusted EPS is guided to about $1.43, against $1.23 a year earlier. The 2027 outlook was more restrained. Management intends to raise investment in both transaction margin and operating expenses and is targeting adjusted EPS growth similar to this year’s. Its medium-term ambition of mid-single-digit transaction margin growth and double-digit EPS growth now sits beyond next year.

Investors responded with caution rather than alarm. The shares had fallen 3.6% to $54.99 the day before the report. They slipped 2.6% before the open and at one point traded about 4.5% lower before recovering toward the prior close. That ambivalence reflects a valuation still shaped by a transaction that never happened. In July, Stripe and Advent International offered $60.50 a share, about $53 billion, a bid Reuters reported the board considered inadequate. Bloomberg reported in late August that the consortium had withdrawn. On the call, Lores said the board would assess any proposal objectively but that executing the plan offered the greatest value today. With the stock still below the price the board declined, the third quarter settled the question of discipline. The question that will ultimately judge that refusal, whether PayPal can grow again, remains open.