Shares of popular financial technology firm PayPal (PYPL) have been in free-fall mode since last summer.
Now down around 61% from its peak near the $300 level, the name is starting to look compelling dip buy, but after clocking in a sub-par quarterly report with a side of excuses and downgraded guidance, could PayPal stock deserve to have shed the entirety of its recent gains?
At 34.2 times trailing earnings, PayPal stock is starting to look reasonably valued versus its longer-term growth. Still, without any meaningful catalysts and a potential pick-up in competition in the fintech space, I’ll be taking a raincheck on the name. Indeed, recent analyst downgrades seem warranted and could cause a sustained decline to much lower levels.
With expectations as low as they are, though, I wouldn’t bet against the stock. The company also has some growth levers it can pull to help the firm pole-vault over a now pretty low bar. For now, I am neutral on PYPL stock.
Underwhelming Q4
For investors, there’s nothing worse than a confirmation of one’s fears. PayPal’s quarterly results themselves were not great, but they weren’t the worst part of the reveal.
The company’s weak guidance for 2022 was a major reason investors threw in the towel while inspiring analysts to cut their price targets. Indeed, original price targets are now a long shot amid PayPal’s drastic valuation reset.
For the fourth quarter, PayPal actually clocked in an in-line per-share earnings number of $1.11, just a penny shy of the consensus estimate. The modest 13% in revenue growth was not at all indicative of a fast-grower that deserved to trade at a multiple over 10 times sales.
Now trading at under six times sales, the stock is attempting to find the right spot to settle. Thus far, shares have shown no signs of slowing down. Could it be that PayPal stock may be worth far less than it was before the pandemic struck? I wouldn’t doubt it, as investors brace themselves for a weaker-than-expected year.
Indeed, management had plenty of excuses for the weaker guidance, many of which had to do with the macroeconomic environment. Undoubtedly, investors were not impressed with the fintech leader that could be in a spot to lose a step as the fintech space looks to become more crowded with time.
2022 Looks Bleak
While 2022 is shaping up to be a meager year for PayPal, the stock still seems oversold, with an earnings bar that’s set so low that it won’t take much to propel it out of the gutter.
Looking ahead, PayPal’s partnership with Amazon (AMZN) to allow American customers to pay via popular payments app Venmo is encouraging.
Could it be that Amazon has tilted the payments space in favor of the fintech giants like PayPal and against the dominant credit card companies? Perhaps.
Amazon may have stopped its plan to stop accepting Visa (V) credit cards in the U.K., but its original intent was loud and clear. Amazon isn’t a huge fan of the fees that the credit card companies have been charging customers.
Moving forward, I think Amazon could be in a spot to make a big splash in the payments space. For now, the retail behemoth seems more willing to accept more innovative ways of paying.
New Features Could Reignite Growth
It’s not just teaming up with retail behemoths that could help PayPal stock put in a bottom and rally after a brutal start to 2022. The company has shown it’s on the right side of innovation in the fintech world.
Despite its maturity and slowed growth, the company wasted no time in jumping aboard the Buy Now Pay Later (BNPL) bandwagon.
PayPal has also been embracing cryptocurrencies with open arms and could be in a spot to evolve into more of a neobank than just another payments platform. I’d look for the company to add new, bank-like features and crypto innovations to its arsenal in the new year. If there’s a company that can innovate its way out of a slump, it’s PayPal.
That said, PayPal is no longer one of few games in town. The payments space is ripe for disruption, and rivals could make it tougher to keep growth and margins elevated.
Wall Street’s Take
According to TipRanks, PYPL stock comes in as a Moderate Buy. Out of 37 analyst ratings, there are 27 Buy recommendations, nine Hold recommendations and one Sell recommendation.
The average PayPal price target is $186.24, implying an upside of 51%. Analyst price targets range from a low of $125 per share to a high of $245 per share.
Bottom Line on PayPal Stock
PayPal stock has been severely oversold, but I’m not ready to get bullish. The stock still seems richly valued, even given the reset of expectations. Whether PayPal can excite Wall Street in the face of rising interest rates remains to be seen.
Once PayPal stock does finally ricochet off a bottom, it could bounce sharply. For now, I’m in no rush to catch the falling knife, as management has its hands full in the new year, with an investor base that’s growing skeptical.
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