Is Takeout Target PayPal a Buy?

PayPal (NASDAQ: PYPL) recently turned down an offer to be acquired by Stripe and Advent for $60.50 a share, and that looks like a smart move. While the stock has been decimated, losing 80% of its value over the past five years, the company is still growing its revenue. Its valuation is very cheap, with it trading at a forward price-to-earnings (P/E) ratio of just 10 times 2027 analyst estimates. Most importantly, though, the company remains a free cash flow machine.

Huge free cash flow

While PayPal has struggled with weakening transaction margins (similar to gross margins), it continues to see solid revenue growth. In the second quarter, its revenue rose 5% to $8.86 billion, while total payment volumes (TPV) climbed 10% to $486.5 billion. Higher-margin branded TPV increased by 2%, similar to last quarter. Venmo and Braintree continued to be standouts with mid-teens TPV growth.

Transaction margin dollars, meanwhile, rose 1% to $3.9 billion, and were up 3% excluding interest on customer balances. The number of PayPal's active accounts stayed steady at 439 million, while the number of transactions climbed 8%.

This all led to adjusted earnings per share (EPS) falling by 1% to $1.38 in Q2. However, that was well ahead of the $1.28 that analysts were expecting, as the company had forecasted a 9% decline.

Given its solid results, PayPal now expects adjusted EPS to come in at around $5.38 for the year, up over 1% from a year ago. That compares to prior guidance of a low-single-digit decline to slightly positive. For the third quarter, it projected adjusted EPS to fall by low single digits.

Perhaps the most important metric for PayPal at this time, though, is free cash flow. It saw its Q2 adjusted free cash flow surge more than 175% to $1.8 billion. It is projecting adjusted free cash flow of at least $6 billion, which it will use to repurchase $6 billion worth of its stock.

When asked about the company potentially getting acquired, CEO Enrique Lores said it will look at its options, but that he thinks management has a plan in place that can create significant shareholder value. This includes a $1.5 billion cost savings and efficiency plan that includes technology investments, while also continuing to innovate in areas such as agentic payments and digital identity.

Time to buy the stock

While the proposed buyout offer would have given recent investors a nice return, the right move was to reject it. The company is generating a ton of free cash flow and buying back stock. At its current pace, it would be able to buy back the entire company in eight to nine years.

Meanwhile, the buyout proposal should help set some type of floor on the stock, while there is the potential that a higher bid could come in later. PayPal's business and free cash flow generation are worth significantly more than where the stock trades today, making it a great value stock to own at these levels.

Geoffrey Seiler has positions in PayPal. The Motley Fool has positions in and recommends PayPal. The Motley Fool recommends the following options: short September 2026 $47.50 calls on PayPal. The Motley Fool has a disclosure policy.