PayPal’s stock has plummeted from a 300 billion peak to just 39 billion, trading at a mere 7.8x trailing P/E and ~7x free cash flow yield. With promises of 6 billion in buybacks, the implied shareholder return looks enticing—around 15%. But beneath the cheap valuation lies a deteriorating business model. Once the undisputed king of online payments, PayPal is being squeezed from both sides: Apple Pay dominates high-frequency consumer (2C) transactions with superior user experience and near-zero merchant fees, while Shopify’s Shop Pay offers merchants faster checkout and deeper integration. As its take rate collapses—from 3.04% in 2016 to just 1.75% today—PayPal is transforming from a high-margin platform into a low-margin B2B payment utility. In tech, where innovation dictates survival, “cigar butt” investing can be a value trap. As Buffett wisely noted:“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
The Illusion of a Bargain
On the surface, PayPal (PYPL) appears irresistibly cheap. After a post-earnings crash that wiped out 20% of its value, the company now trades at less than 8x earnings—a fraction of its 2021 glory days. Management pledges 6 billion in share repurchases in 2026, which, if fully executed and assuming stable profits, could deliver a 15% annual return to shareholders. At that rate, you’d “earn back” your investment in under seven years.
But this math hinges on a dangerous assumption: that PayPal’s profits won’t erode further.
In reality, the company is caught in a structural decline. Its core advantage—the network effect between consumers and merchants—is crumbling under pressure from two formidable rivals: Apple Pay and Shopify’s Shop Pay.
How Apple Broke PayPal’s Moat
PayPal thrived in the PC era as the default online checkout option. Merchants had little choice: excluding PayPal meant losing up to 30% of conversions due to friction in the payment process. Users were habituated to clicking the blue button; it was the path of least resistance.
Then came Apple.
Leveraging its 70% smartphone market share in the U.S., Apple didn’t build a payment network from scratch—itinherited one. Through iTunes and the App Store, Apple already held 800 million credit-card-linked accounts. A simple prompt—“Add your card to Apple Pay?”—instantly gave it more active payment users than PayPal had amassed in 15 years.
But adoption wasn’t enough. Apple ensuredretention through unmatched user experience: Face ID + NFC enables one-tap, password-free payments—faster and more secure than typing in card details or logging into PayPal.
Critically, Apple charges merchants almost nothing—just the standard 0.1–0.3% card network fee—versus PayPal’s 2.9%. For merchants, switching to Apple Pay isn’t just convenient; it’s profitable. And because Apple makes money from hardware and App Store commissions (not payments), it can afford to subsidize the ecosystem to lock users into its walled garden.
The result? Consumers now prefer Apple Pay both offlineand online. Even on Macs (which now hold nearly 18% U.S. market share), iPhone users can authenticate payments via Face ID using “Continuity.” Mobile commerce already accounts for over 60% of U.S. e-commerce—and Apple owns the mobile experience.
Shopify’s Silent Coup in E-Commerce
While Apple attacked from the consumer side, Shopify struck from the merchant side.
Shop Pay isn’t just another checkout button—it’s deeply integrated into Shopify’s merchant toolkit. It offers faster load times, higher conversion rates, and access to real-time inventory and logistics data. For a merchant running a Shopify store, Shop Pay isn’t just cheaper—it’ssmarter.
Why would a rational business owner prioritize PayPal’s brand over a tool that directly boosts revenue and reduces friction? They wouldn’t. Many now place Shop Pay front-and-center, relegating PayPal to a secondary option—or removing it altogether.
The Take Rate Collapse Tells the Real Story
PayPal’s total payment volume (TPV) continues to grow—but its ability to monetize that volume is vanishing. The take rate (revenue as a % of TPV) has fallen from 3.04% in 2016 to just 1.75% in 2025. This isn’t a cyclical dip; it’s a secular trend driven by competitive displacement in its most profitable segment: consumer-facing online payments.
Much of PayPal’s remaining growth now comes from low-margin B2B processing for companies like Uber and Airbnb—businesses where pricing power is minimal and competition fierce (Stripe, Adyen, etc.). This is utility work, not platform economics.
Meanwhile, its much-hyped Venmo unit—often compared to WeChat Pay—struggles to monetize peer-to-peer transfers. Users expect free transfers; charging even 1% would spark revolt. Its foray into crypto trading (BTC, ETH) remains volatile and low-margin, offering no durable path to meaningful cash flow.
Why “Cheap” Isn’t Enough in Tech
Warren Buffett’s famous cigar-butt strategy—buying deeply undervalued, declining businesses—works poorly in fast-moving tech. Unlike railroads or toll booths, digital platforms don’t enjoy static advantages. User habits shift quickly. New entrants with better UX or ecosystem leverage can dismantle decades of network effects in just a few years.
PayPal isn’t failing because of poor management—it’s failing because the game changed, and it lacks a credible response. Buybacks aren’t a sign of strength; they’re a signal that management sees no better use for capital. As Buffett himself said:“The best businesses can reinvest large amounts of capital at high returns. The worst must spend heavily just to stay afloat.” PayPal is drifting toward the latter.
Conclusion: Great Company > Cheap Stock
At 8x earnings, PayPal may look like a steal. But valuation is not just about current earnings—it’s about thetrajectory of those earnings. When take rates are falling, user growth is flatlining, and your biggest competitors are giving away your core product for free, the risk of permanent capital loss outweighs the allure of a high yield.
As Charlie Munger might say: “All intelligent investing is value investing—but not all cheap stocks are valuable.”
In tech, you don’t want a dying highway tollbooth. You want a growing city. And right now, PayPal’s city is shrinking.
So no—despite the tempting numbers, PayPal isn’t a cigar butt worth picking up. Because in the world of technology, sometimes the cheapest smoke is the one that’s already gone out.