One-Foot Bars and PayPal ($PYPL)

A paid subscriber asked me to look at PayPal's Q4 2025 earnings. Here's why I used to own it, why I sold, and why I'm not going back.

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I used to be a PayPal shareholder.

I bought it at the time because the valuation had gotten cheap and I thought there was turnaround potential.

I sold because my investing philosophy changed. I found better opportunities elsewhere that fitted this new approach, and PayPal no longer made the cut.

Warren Buffett once said:

“I don’t look to jump over seven-foot bars: I look around for one-foot bars that I can step over.”

He expanded on this in his 1989 Berkshire Hathaway letter:

“What we have learned is to avoid [difficult business problems]. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers.”

PayPal, to me, is a seven-foot bar. And the Q4 2025 earnings report only reinforced that view.

A paid subscriber, Tank, asked me to take a look at the quarter, so let’s do that, and then talk about why I think investors focused on situations like this are making their lives harder than they need to be.

The Quarter

PayPal reported Q4 2025 results on February 3rd, and the stock cratered ~20%. As of writing, shares trade around $40, near their 52-week low. Here’s what happened.

FY’25 headline numbers:

• Revenue: $33.2B, up 4% YoY (4% FXN)

• Non-GAAP EPS: $5.31, up 14%

• GAAP net income: $5.2B, up 26%; GAAP EPS: $5.41, up 35%

• Total payment volume (TPV): $1.79T, up 7% (6% FXN)

• Adjusted free cash flow: $6.41B

• Returned $6B to shareholders via repurchases, reducing weighted average shares by 7%

On the surface, these numbers aren’t terrible. Revenue grew. EPS grew. FCF was strong. They bought back a ton of stock. They even initiated their first-ever quarterly dividend at $0.14/share.

Q4’25 specifically:

• Revenue: $8.68B, up 4% (3% FXN), missed estimates of $8.79B

• Non-GAAP EPS: $1.23, up 3%, missed estimates of $1.29

• TPV: $475B, up 9% (6% FXN)

So they missed on both lines. Not catastrophically, but enough to matter when paired with what came next.

The real damage came from guidance and the CEO change.

Guidance

PayPal guided FY’26 non-GAAP EPS growth to be flat to slightly positive. The Street was expecting ~8% growth. GAAP EPS is expected to decline mid-single digits.

Transaction margin dollars (the metric PayPal has been trying to get investors to focus on) are expected to be roughly flat or slightly declining for FY’26. Adjusted free cash flow is expected to exceed $6B again, with $6B earmarked for share repurchases and ~$1B in CAPEX.

Perhaps most telling: management said it would no longer provide a specific long-term outlook, and would only guide one year at a time “due to market uncertainty.”

When a company stops giving long-term guidance, it’s usually not because they’re brimming with confidence.

The CEO Change

The board replaced Alex Chriss, who was brought in barely two years ago to turn this ship around, with Enrique Lores, the former HP CEO. The stated reason was that “execution was not in line with expectations.”

This is the second CEO change in recent memory.

Dan Schulman handed the reins to Chriss in late 2023 amid slowing growth and competitive pressures. Now Chriss is gone too.

That is not the cadence of a company that has its act together.

On the earnings call, management was notably defensive. The words “too slow” and “not enough focus” came up repeatedly. Branded checkout growth is guided to be flat to slightly positive. The company acknowledged that merchant integration has lagged expectations. When your own management characterizes their execution as insufficient, it’s hard for an outside investor to be more optimistic than they are.

The Bull Case (And Why I Don’t Bite)

I’ll be fair. There is a bull case here.

The stock trades at roughly 8x trailing earnings and ~10x forward earnings. For a company generating $6B+ in free cash flow, that’s optically cheap. The FCF yield is north of 10%. If they execute on $6B/year in buybacks, the share count will continue shrinking meaningfully. They already reduced it by 7% in FY’25. At this price, the buybacks are accretive.

Venmo was a bright spot, with revenue accelerating to $1.7B (up ~20% YoY), active accounts surpassing 67M, and monthly active accounts up 14%. Enterprise Payments (formerly Braintree) TPV returned to double-digit growth. Buy Now, Pay Later TPV exceeded $40B, growing over 20%.

There are strategic partnerships in the pipeline. PayPal announced it will be the first integrated payments wallet in OpenAI’s ChatGPT, and has a new partnership with Google. They’re investing in AI, agentic commerce, ads/personalization, and stablecoins.

And the company ended the year with $14.8B in cash and investments against $11.6B in debt. This isn’t a balance sheet in distress.

So yes, is there upside from $41? Probably.

But here’s my issue…

The Seven-Foot Bar

The question I keep coming back to is not “can PayPal work from here?” It’s “why would I bother?”

This is a company that:

• Just fired its second CEO in two years

• Guided for essentially zero EPS growth in a year the market was expecting 8%

• Stopped giving long-term guidance

• Is admittedly behind on execution in its core branded checkout product

• Faces intense competition in every single vertical it operates in, from Apple Pay and Google Pay in consumer payments, to Stripe and Adyen in merchant processing, to Affirm and Klarna in BNPL

• Has payment transactions per active account declining 5%

• Has active accounts essentially flat at 439M (up 1%)

The turnaround thesis requires you to believe that a new CEO (the company’s third in three years), from outside the payments industry, will execute better than his predecessor, in a more competitive market, with weaker near-term fundamentals.

That’s a lot of things that need to go right.

And even if it does go right, what do you get? Revenue growing 4%. Maybe some margin expansion. Buyback-driven EPS growth.

At best, you’re looking at a slow grind higher as the market gradually re-rates a company that has given investors almost no reason to trust it over the past several years.

This is the seven-foot bar. You can clear it, maybe. But you’re going to work extremely hard for a mediocre payoff.

One-Foot Bars Exist

This is where my philosophy has evolved, and why I’m writing about PayPal despite having no position anymore and no intention of establishing one.

The opportunity cost of investing in a turnaround like PayPal is enormous. Every dollar you put here is a dollar not invested in a growing, profitable microcap trading at a similar or cheaper multiple, except with actual organic growth, less competition, and a simpler path to re-rating.

The microcap universe is filled with companies growing revenue 20-30%+, with aligned management teams, in niche markets with limited competition, trading at 8-12x earnings.

These are one-foot bars.

At some point, I realized that spending time analyzing companies like PayPal, figuring out whether the turnaround will work, modeling what normalized margins could look like, handicapping whether a new CEO from HP can outperform in fintech, is energy I could spend finding the next company where the thesis is obvious.

That’s what Buffett was getting at.

It’s not that seven-foot bars can’t be cleared.

Some people clear them.

But the expected return on your time and capital is dramatically better when you focus on the easy ones.

Speaking of which…

Next week I’m publishing a full writeup on a company I’m adding to my portfolio.

It’s the exact opposite of the PayPal situation. A 40-year-old European defence compounder that just delivered 61% revenue growth, 388% net income growth, 68% recurring revenue, and trades at roughly 11x forward earnings.

Record results, largest order in company history, and almost no analyst coverage.

That’s a one-foot bar in my opinion. Paid subscribers will get the full thesis.

Subscribe to get the full writeup next week.

Thanks for reading. Hope you have a great weekend.

Dom
Schwar Capital

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