PayPal Holdings, Inc. (PYPL) experienced an 8.7% stock decline following its second-quarter earnings report, despite surpassing revenue and earnings per share estimates. The market reaction was primarily driven by a significant year-over-year decrease in payment transactions, raising investor concerns about core user engagement and underperformance relative to the broader market.

Market Reaction to Q2 Results

PayPal Holdings, Inc. (PYPL) saw its shares decline 8.7% in trading following the release of its second-quarter results on July 29. This decline occurred despite the digital payments giant reporting revenues of $8.3 billion, a 5% year-over-year increase that surpassed consensus estimates, and non-GAAP earnings per share (EPS) of $1.40, an 18% year-over-year rise that exceeded Street expectations by 7.7%.

The primary factor unsettling investor confidence was a 5.4% year-over-year drop in the number of payment transactions conducted through PayPal’s platform, totaling 6.2 billion. This metric overshadowed a 6% year-over-year increase in Total Payment Volume (TPV) to $443.5 billion.

Underperformance and Core Engagement Scrutiny

PayPal has notably underperformed the broader market and peers. On a year-to-date basis, PYPL stock has declined 19.8%, and 5.7% over the past 52 weeks. This contrasts sharply with the S&P 500 Index ($SPX), which surged 10.6% year-to-date and gained 17.8% over the past year. Furthermore, PayPal has traded consistently below its 200-day moving average since late February and its 50-day moving average since late July, indicating a bearish trend. In comparison to its peer, Block, Inc., PayPal has significantly lagged, as Block recorded 18.2% gains over the past 52 weeks.

The market’s negative reaction, despite strong top and bottom-line beats, underscores a heightened investor focus on core engagement metrics like transaction frequency. The decline in transaction count, even with rising TPV, suggests a shift where users might be making fewer but larger purchases. This raises questions about reduced everyday usage and potentially weakening customer engagement, which is critical for a company like PayPal that thrives on transaction volumes.

PayPal CEO Alex Chriss attributed some of the drag to tariff-related weakness in Asia-based platforms and cross-border volume deceleration. However, company management also indicated that the decline in certain transaction volumes was a deliberate strategic choice to reduce unprofitable payment service provider (PSP) volume. Excluding these specific PSP transactions, payment transactions reportedly grew by 6%, suggesting strength in branded experiences, Venmo, and peer-to-peer payments.

Strategic Shift and Valuation

PayPal, with a market capitalization of approximately $70.43 billion, is undergoing a strategic shift towards profitable growth. The company is prioritizing higher-margin segments like branded checkout and moving away from lower-margin divisions such as unbranded processing. This strategic pivot aims to improve profitability, as evidenced by an 18% year-over-year increase in non-GAAP EPS and a 6.5% rise in transaction margin.

From a valuation perspective, PayPal’s Price-to-Earnings (P/E) ratio stands at 17.36x, which is notably lower than the S&P 500’s forward P/E of 23. The company also reported strong free cash flow (FCF) of $6.8 billion for fiscal year 2024, highlighting its cash-generative business model.

Analyst Sentiment and Future Outlook

Despite the recent stock performance, analysts maintain a