The second quarter's earnings season is winding down. And let's get it out of the way: PayPal (PYPL -0.70%) was not one of the top performers of earnings season. After the company reported its second-quarter results, the stock fell by about 8% the following day.

Despite the stock performance, much of PayPal's results were strong, and the company beat expectations for both revenue and earnings per share (EPS). However, it's important for investors to keep in mind that PayPal's turnaround is still in its early stages, and there's a lot going on behind the scenes that isn't reflected in the numbers just yet.

With that in mind, here's a rundown of how PayPal did in the second quarter, why the stock fell, and what investors should keep an eye on.

Image source: Getty Images.

The key numbers

As mentioned, PayPal reported strong results on both the top and bottom lines. Revenue climbed by 5% year over year, and both revenue and earnings handily surpassed analysts' expectations. Total payment volume came in $10 billion higher than projected, and there are now 438 million active accounts.

However, there was a lot that wasn't what investors were looking for, especially when it comes to profitability. One of the biggest areas of concern is maintaining transaction margins, and the growth rate of this metric declined sequentially. Plus, total operating expenses grew and free cash flow declined, missing expectations by a wide margin.

Why investors shouldn't focus on these results

To be sure, there were some disappointing figures in PayPal's second quarter earnings. But it would be a mistake to put too much emphasis on them.

PayPal is a business that's in the middle of a turnaround. CEO Alex Chriss and his team spent much of 2024 focusing on efficiency, and it would be fair to call that a success. Now, PayPal is stepping on the gas when it comes to growth, rolling out many new initiatives and planning many more, but these aren't apparent in the numbers just yet.

The company's new advertising platform is one example. It was launched in October 2024 but is still rather small. Monetization of Venmo is another big focus, and this one is actually starting to show up in the results. In fact, Venmo payment volume grew 12% year over year in the second quarter, while Venmo revenue grew 20%. That's a good indicator that the typical Venmo user is generating more income for the business.

This could just be the beginning. Back in February, Chriss and his team laid out their long-term growth strategy in a 224-slide presentation (link opens a PDF). And just to name some of the highlights:

• PayPal ultimately wants to combine all of its platforms (PayPal, Venmo, Braintree, etc.) into one.
• The company sees a massive opportunity in offline (in-store) payments. This is a $200 billion market, of which PayPal has less than 1%. Scaling the omnichannel business is a major priority.
• PayPal plans to leverage its more than 500 petabytes of data from more than 430 million active accounts. One way it's doing that is through targeted advertising, but this is just one potential application.
• PayPal aims to utilize AI technology to boost engagement and add value to the platform. For example, AI can choose the credit card with the best rewards from a customer's wallet for a specific purchase.

These are just a few examples, and I'd encourage you to look at the full presentation to get a complete picture of management's vision. In all, management believes PayPal can achieve an EPS growth rate in the "low teens" by 2027, and accelerate beyond that to a sustainable 20%-plus EPS growth rate in the long term. Given the results of the past few years, this seems like an ambitious goal, but with a current valuation of about 11 times free cash flow, the stock could be a massive win for investors if management can do it.