Morgan Stanley: PayPal's financial report is impressive but below expectations, three major structural challenges restrict valuation space.

Morgan Stanley's latest research report shows that PayPal Holdings Inc. achieved a net income of $8.288 billion in the second quarter, with adjusted EBITDA of $1.644 billion and non-GAAP earnings per share of $1.40. Although showing diversified growth momentum in the payment sector, the progress of core business optimization is not as expected. The rating is maintained at "Equal-weight" with a target price slightly raised from $74 to $75, corresponding to a 13 times price-earnings ratio for adjusted earnings per share in 2026. This assessment is based on the coexistence of the expansion results of the company's online payment ecosystem and structural challenges. Differentiated performance in business growth The integration of Venmo with the main PayPal platform has shown significant results, with the Pay With Venmo transaction volume increasing by 45% year-on-year in the second quarter, driving a 20% overall revenue growth for Venmo. The Branded Experiences business maintains robust growth of 8%, covering innovative scenarios such as Buy Now Pay Later (BNPL), offline debit cards, and contactless NFC payments. The NFC user base has reached 3 million and will expand to the UK market in the second half of the year. It is worth noting that although the research report does not specify the specific financial contribution of WeChat Pay integration, it emphasizes that the synergistic effect between PayPal and modern checkout systems is deepening. Financial data confirms operational efficiency improvement In the second quarter, the company achieved a net income of $8.288 billion (+3.5%), transaction revenue of $7.441 billion (+4.0%), and value-added service revenue of $847 million (+13.4%). The profit performance is more impressive, with adjusted EBITDA reaching $1.644 billion (+16.4%), and non-GAAP earnings per share of $1.40 (+16.0%). Although the gross profit margin decreased slightly by 0.6 percentage points to 46.4%, the effects of cost optimization are beginning to show. Morgan Stanley predicts that adjusted EPS will reach $5.22 and $5.80 in 2025-2026, relying on low double-digit growth expectations from operational efficiency improvements and the continuous implementation of share repurchase plans. Structural opportunities and challenges in the Chinese market The online branded checkout business grew by 5% in the second quarter (after adjusting for leap year factors), and the contribution of Chinese cross-border merchants affected by tariffs to the US e-commerce market has softened, but showed improvement signs in July. The report specifically points out that these merchants' participation in US retail e-commerce transactions through the PayPal system is recovering, demonstrating the company's resilience in the cross-border payment field. Structural challenges constrain valuation upside Although PayPal maintains the industry's lowest user churn rate and the widest online acceptance, three major pain points limit its valuation breakthrough: first, the limited improvement in conversion rates with the Venmo button at large e-commerce sites, with some merchants removing the option shortly after integration, exposing inadequate merchant acceptance and user stickiness; Second, transaction and loan loss rates have increased to 11 basis points of TPV (compared to 9 basis points in the previous quarter), mainly due to the normalization of credit losses and an increase in fraud rates for new products such as debit cards; Third, while the accelerated expansion of BNPL and credit services can drive revenue growth, it may introduce cyclical risks, and Morgan Stanley remains cautious about this. Investment logic and target price analysis The current "Equal-weight" rating reflects the balance of institutional recognition of PayPal's strategic value and short-term challenges. The target price of $75 is based on a 13 times dynamic price-earnings ratio in 2026, with a discount of about 5% from the industry average level, mainly considering the lag in brand checkout optimization progress and the uncertainty of Venmo's monetization capabilities. The report emphasizes that if PayPal can achieve breakthroughs in three areas: checkout experience upgrades (such as improving the conversion rate of the Venmo button), risk control (reducing loss rates), and penetration of emerging markets, there may be upward revision potential in its valuation central point. In conclusion, Morgan Stanley believes that PayPal is at a critical period of business optimization and risk control. Its leading position in the industry and operational efficiency improvement provide fundamental support, but the commercialization progress of core products will be a key variable determining valuation elasticity.