It has been a testing year for PayPal (NASDAQ:PYPL) investors. While the markets have been on the up for most of the year with tech driving the gains, the digital payments leader has been entirely excluded from the rally; to wit, the stock is down by 17% on a year-to-date basis.
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In fact, the losses have pulled the shares down to what is practically an all-time low valuation multiple. This is a point picked up by BMO analyst Rufus Hone, who thinks the shares have been “pressured due to investor concerns around market share losses, an aggressive pricing environment in unbranded processing, and slower e-commerce growth.”
The problem, however, is that without a “meaningful acceleration” in gross profit growth, Hone thinks it will be “challenging for PYPL’s stock to re-rate.”
And that is most likely not going to happen anytime soon. Take out the benefits seen in recent quarters from OVAS (other value added services) tailwinds and transaction-related gross profit growth has been notching year-over-year drops for four quarters in a row.
Yet, on account of “ongoing intense competition within unbranded processing (Braintree), and slower momentum in Branded Checkout,” Hone anticipates PayPal will keep on realizing only slow near-term growth in transaction margin dollar growth. “We expect growth will remain negative on a YoY basis until 2Q24E,” Hone expounded on the issue, “and anticipate a recovery into the mid-single digits (below consensus expectations at mid-to-high single-digit growth in 2024E/2025E).”
Hone also makes the case that given new CEO Alex Chriss only joined the company about two months ago, there’s “lower-than-normal visibility regarding medium-term financial expectations.”
It’s not all bad, though. PayPal has designated the ongoing roll-out of PPCP (PayPal Complete Payments — the company’s SMB commerce platform) as a “top priority.” Customers are poised to gain advantages from PayPal’s extensive data resources, leading to a streamlined checkout process and the implementation of an advanced checkout system that should enhance conversion rates. “In addition,” says Hone, “greater scale at PPCP will partially help offset the downward pressure on transaction margins from Braintree.”
So, ultimately, what does this all mean for investors? All told, Hone assumed coverage of PYPL with a Market Perform (i.e., Neutral) rating and $65 price target. (To watch Hone’s track record, click here)
Elsewhere on the Street, PayPal stock garners an additional 21 Buys and 12 Holds, all coalescing to a Moderate Buy consensus rating. The average price target currently stands at $73.48, making room for 12-month returns of ~25%. (See PayPal stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
