PayPal's efforts to increase profitability are hindering the growth of its unbranded business, resulting in a 10% decline in shares.

PayPal's stock took a nearly 10% hit on Tuesday after the company's unbranded card processing segment experienced a significant slowdown in growth, and its operating margin decreased in the fourth quarter.

Unbranded payments, which involve processing transactions for other companies instead of PayPal directly, have typically been a low-margin area due to intense competition, but they had been growing rapidly in recent years.

With CEO Alex Chriss at the helm, PayPal is pursuing an ambitious turnaround strategy focused on 'profitable growth' and has adjusted its pricing for these services, which has led to some customers leaving.

In the fourth quarter, the growth rate for PayPal's unbranded payment processing dropped sharply to just 2%, down from 29% the previous year.

"Management is now placing a greater emphasis on profitable growth for the Braintree product, which is the non-PayPal branded checkout option. This shift has slowed payment volumes but has improved overall profitability," noted Edward Jones analyst Logan Purk.

On the other hand, growth in PayPal's branded products—where users and merchants engage directly on its platform, like Venmo—also fell short of some analysts' expectations, overshadowing a positive profit forecast for 2025 that exceeded Wall Street's predictions.

Wolfe Research analyst Darrin Peller pointed out that the stock drop was due to branded product growth only increasing by 6%, falling short of the expected 7%, despite the overall e-commerce surge, PayPal's marketing efforts, and enhancements to the checkout process.

Analysts believe these results could hinder some of the progress PayPal has made in alleviating investor worries about profit margins, which had thrived for years due to being a first mover but have declined post-pandemic amid reduced spending and increased competition.

Tech giants like Apple and Google's parent company Alphabet are stepping into PayPal's territory, while traditional card networks like Visa and Mastercard have also been ramping up their digital payment services lately.

Even though PayPal saw its adjusted operating margins dip by 34 basis points to 18% in the last quarter, their push for profitable growth allowed them to end the year with margins up 116 basis points to 18.4%.

Purk mentioned, "While management has made some incremental steps, we believe the potential upside in shares is equally offset by execution risks and profitability headwinds." 

If the stock's 9.5% drop sticks around until the market closes, it will mark the company's worst day in nearly a year.

PROFIT PUSH

Since taking the reins in late 2023, PayPal CEO Chriss has been all about high-margin products and has renegotiated pricing with several merchants.

"We set out at the beginning of 2024 to make it a transition year to narrow our focus and to make sure we are executing the initiatives that matter the most to the growth of our business," Chriss shared during a call with analysts.

The company is also working hard to maintain its leading position by rolling out new features like a "one-click" checkout option called Fastlane and forming profitable partnerships with firms like Global Payments and Fiserv.

PayPal is projecting its full-year adjusted profit to hit between $4.95 and $5.10 per share, which beats Wall Street's expectations of $4.90 based on estimates from LSEG.

In the fourth quarter, they reported an adjusted profit of $1.19, exceeding the $1.12 estimate. Revenue climbed 4% to $8.4 billion, and total payment volume increased by 7%.