Omicron is spreading, lockdowns are coming, and consumer spending is trending down. That’s the upshot of a pair of new reports out from investment bank Wedbush — and the reason that Wedbush’s 5-star analyst Moshe Katri cut his price target on PayPal (PYPL) stock to $220 a share (from $240).
“Heading into CY2022, we believe results/sentiment will continue to be driven by the pandemic’s impact on consumer spending, as well as travel,” opines Katri. “Uninspiring” Black Friday and Cyber Monday sales, followed by a broader “Retail data miss” have the analyst thinking that things are “likely get worse” before they get better, especially with inflation driving up the price of goods and frightening consumers into husbanding their savings. On average, Katri sees these trends depressing retailers’ revenue and earnings by 5% to 10% in the December quarter.
That last bit may seem counterintuitive. Inflation grows price tags, after all, and logically, it should result in more spending when consumers shop, rather than less. But the key phrase there is “when consumers shop.” If inflation depresses the urge to spend at all, then inflation-inflated prices won’t necessarily translate into higher sales, or higher spending, or benefit companies like PayPal and its peers. In Katri’s view, therefore, inflation will — like Covid — act as “headwinds… impacting companies with credit exposure as well as companies with high exposure to credit volumes.”
Thus, investors should be anticipating difficulties with companies like Visa and Mastercard, Fiserv and Square — and PayPal, too.
Regarding PayPal in particular, the 5-star analyst notes that the company will probably still be able to grow in the mid to high teens percentage range, although its pro forma growth rate may be “masked” by eBay’s evolution away from using PayPal as its favored method of paying for auction purchases, and towards using eBay’s own managed payments system. This could result in growth under GAAP accounting standards slowing from the company’s historical pace. For context, in the 2015 to 2020 period PayPal was able to grow sales 18% annually on average, with earnings growing at 25%.
Indeed, already this year, Katri observes that PayPal’s sales growth has slowed markedly, from a 30.6% year over year pace set in Q1 to 18.5% in Q2 to 13.2% in Q3 to just 12.3% in Q4 (estimated). For the full year, the analyst believes sales growth will still work out to 18% overall, but he sees that rate decelerating in 2022 — falling to 14.9%. The situation will be similar with earnings. Katri notes that PayPal will probably end up growing its earnings 18.3% over 2020 levels this year, but in 2022 that growth rate will drop to just 10%.
Given that PayPal stock currently sells for more than 40 times 2021 estimated earnings, and nearly 37 times what it’s expected to earn in 2022, that projected 10% earnings growth rate seems a very slim reed upon which to support such a pricey valuation. Nevertheless, Katri maintains an Outperform rating on PayPal stock, while his $220 price target implies 17.5% upside from current levels. (To watch Katri’s track record, click here)
Wall Street is broadly in agreement with this analysis. Over the last couple of months, 26 Buy ratings, 5 Holds, and a single Sell. Indeed, with an average price target of $270.87 per share (44% upside), if anything, other analysts are more optimistic about PayPal, than is Wedbush. (See PYPL stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
