PayPal: Competition Is Fierce, but Are Fears Overdone?

PayPal Holdings (PYPL) stock has reversed viciously in recent months, now down around 40% from its July peak.

With the latest analyst downgrade by Bernstein, who sees the firm being on the receiving end of increasing competition, more salt has been rubbed in the wounds of the fintech giant.

Despite the Bernstein downgrade, most analysts remain incredibly bullish on the stock, with a consensus price target just north of $276, implying around 47% upside from current levels. I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks)

Queue More Downgrades?

The real question that should be on investors’ minds is if further downgrades will ensue, as upside potential starts to become unrealistic. Indeed, further downgrades could cause a considerable amount of downside, potentially back to the $123 pre-pandemic range.

Increasing competition is never a good thing, but the width of PayPal’s moat should not be discounted. The company has a lot of levers to pull to maintain its spot atop fintech. Still, Buy Now Pay Later (BNPL) firms are hungry, and they pose a severe threat to incumbent players like PayPal.

Moreover, a fintech first-mover has been able to command lofty fees for its services. As the space gets that much more crowded, downward pressure is due to be applied to such fees.

A questionable trajectory of margins moving forward and evidence of slowed growth in the latest (third) quarter does not bode well for the company, especially as pandemic tailwinds continue to fade.

PayPal is up against it, but most of such pain has likely already been baked into the share price. A 40% peak-to-trough decline is nothing to sneeze at. After such a plunge, PayPal stock trades at 9.1 times sales, making it a compelling value option in a crowded arena.

Perhaps partnerships — think Venmo joining forces with Amazon (AMZN) — can help alleviate competitive pressures by up-and-coming financial disruptors. Still, at the end of the day, if PayPal can’t innovate and gain ground on its hungry peers, it will ultimately lose share.

For the third quarter, total payment volume rose 24% year-over-year on a constant-currency basis. Revenue came in at $6.2 billion with per-share earnings of $1.11, a slight beat over the consensus estimate, which called for $1.07. Although the quarter was quite strong, the modest slowing of growth was enough for investors to flee.

BNPL to Weather the Storm?

BNPL firms like Affirm (AFRM) are pressuring the incumbents in a big way. PayPal is just another company that’s jumping aboard the BNPL bandwagon alongside the likes of major credit card companies that have already fallen under considerable selling pressure in recent quarters.

While PayPal’s version of BNPL will help alleviate disruptive pressures, it will be tough to play catch up, as the landscape continues shifting. Not to mention behemoths like Apple (AAPL) could pressure PayPal right where it hurts: the wallet.

Apple Wallet is getting better, and one has to think a PayPal-like offering would also complement its Apple Card offering very well. As innovative a company as PayPal is, management’s target of 20% in annual revenue growth over five years could be at risk if PayPal can’t retain its customers, many of whom will be enticed to switch to another platform for their payments.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, PYPL stock comes in as a Buy. Out of 30 analyst ratings, there are 24 Buy recommendations, five Hold recommendations and one Sell recommendation.

The average PayPal price target is $276.04. Analyst price targets range from a low of $190 per share to a high of $342 per share.

Bottom Line

For now, PayPal’s future is hazy. A wave of analyst downgrades could apply even more selling pressure on the stock as the implied upside moves further out of reach.

Disclosure: Joey Frenette owned shares of Apple and Amazon at the time of publication.