PYPL: If you can't handle market turbulence or have time horizon <10 years, stock picking isn't for you.

AI Summary

After PayPal's earnings and flat 2026 transaction-margin guidance, the author reran a DCF with cautious assumptions and concludes the $42.30 price still implies adequate returns, so he is comfortable holding PYPL long term.

PYPL — LONG The author values PYPL using a DCF with a 10% discount rate and a newly bearish 0% FCF growth assumption, arriving at about $57.10 fair value, so at the market's $42.30 price he sees 16.9% returns on flat FCF, 12% if FCF declines 2% annually, and 9.1% in his doomsday case of 5% annual FCF decline. Given those implied returns he remains comfortable holding through the post-earnings drawdown rather than panic selling, framing the 2026 flat transaction-margin guidance as the key catalyst that reset expectations. He judges PYPL deserving of a higher discount rate because of high uncertainty and market beta. Main stated risk is the doomsday scenario where customers abandon PayPal and value-added services or cost cuts fail to offset the decline.

With those findings, I am comfortable with the stock and don't see any reason to panic.

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When you buy value stocks, you should be committing to a 10+ year horizon.  During this time, the price may fluctuate greatly relative to fundamentals. If you are lucky, it will rally and you might make a fast gain. But if you are unlucky, you're either stuck bagholding, or cutting losses if you determine your initial thesis is wrong.

Part of being a good value investor is having a level head when determining if an investment is still worth holding after a crash, or if its crash is justified and warrants selling off to cut losses.

When Paypal reported earnings this morning, I chose to first view the earnings documents without looking at premarket prices. This was to avoid any biases.

Seeing the 2026 guidance for flat TM$, I then did a DCF calculation based on new bearish assumption of 0% FCF growth. I also included $1 Billion SBC as an expense, even though FCF usually excludes it.

Deciding a discount rate was tricky. Most of the US market is valued based on a 5-6% discount rate, but I believe PYPL deserves to use a higher discount rate due to the high degree of uncertainty involving the stock and high market beta. Investors generally expect a higher rate of return to justify owning what's seen as a lousy stock than to own an exciting stock.

Using a 10% discount rate(a rate intended for high risk investments), I got a valuation of $57.10 based on the assumption of no growth. I decided that if the stock opened above $57.10, I would sell.

When I then saw the market's new $42.30 price, I calculated the market either pricing in:

- 16.9% return if free cash flow is flat(bear case/conservative case)

- 12% return if FCF falls by 2% annually in perpetuity(severe bear case)

- 9.1% return if FCF falls 5% per year(doomsday scenario where customers ditch Paypal at extreme rate, and value added services/cost cutting fails to offset this.)

With those findings, I am comfortable with the stock and don't see any reason to panic. 

You shouldn't just buy a stock because some folks on Reddit say its good value. The mistake wasn't buying PYPL, it's buying an individual stock when you lack the risk tolerance to stomach declining market prices.

Also, if you buy call options, you are defeating the purpose of value investing and are just speculating on market sentiment shifts.

Ideas

u/skilliard7 Reddit r/ValueInvesting

DCF says PYPL undervalued; comfortable holding despite flat guidance

The author values PYPL using a DCF with a 10% discount rate and a newly bearish 0% FCF growth assumption, arriving at about $57.10 fair value, so at the market's $42.30 price he sees 16.9% returns on flat FCF, 12% if FCF declines 2% annually, and 9.1% in his doomsday case of 5% annual FCF decline. Given those implied returns he remains comfortable holding through the post-earnings drawdown rather than panic selling, framing the 2026 flat transaction-margin guidance as the key catalyst that reset expectations. He judges PYPL deserving of a higher discount rate because of high uncertainty and market beta. Main stated risk is the doomsday scenario where customers abandon PayPal and value-added services or cost cuts fail to offset the decline.

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Ideas

More from Reddit — r/ValueInvesting