PayPal (NASDAQ: PYPL) stock has been on the receiving end of the recent fintech sell-off. Undoubtedly, the fintech corner of the tech scene became that much more crowded in 2021, with a wide range of Buy Now Pay Later (BNPL) firms moving into the spotlight.
For now, I am neutral on PayPal stock. Many negatives are baked in and there’s a lot of room to the upside if management can change course. That said, competitive pressures could continue to act as a thorn in the side of a firm whose best growth days may be behind it.
Can PayPal Weather the BNPL Storm?
Afterpay, Affirm (AFRM), Sezzle, and Paybright are just a few of the firms that are willing to offer the consumer a better deal to disrupt the payments space. Incumbent firms reliant on their high fees are completely right to be concerned.
Still, one has to wonder whether the interest-free installments offered by the BNPL firms will be in jeopardy once rates begin to rise.
The million-dollar question in 2022 will be if consumers stick with the BNPL firms after the U.S. Federal Reserve moves forward with its promised trio of rate hikes in the new year.
Are the consumers BNPL firms won during these past few years stickier than they seem? Or will they jump back to the old-school payments companies like PayPal once interest-free payments are a thing of the past?
Only time will tell. In any case, PayPal isn’t the only game in town anymore and investors should re-evaluate the changing landscape before buying the dip in PYPL stock, even though shares seem to scream of value after nearly getting slashed in half.
Fortunately, PayPal’s BNPL offering has been met with great success, with usage soaring almost 400% during Black Friday 2021.
With rising competition in the broader payments space, PayPal’s margins may be pressured, even as rates begin to lift off the floor.
PYPL Stock: What About Valuation?
Arguably, the credit card companies and high-multiple fintech plays deserve to take a hit to the chin. PayPal stock got knocked down around 42% off its peak of around $308 per share.
Although PayPal still has a lot of growth left in the tank, it’s worth noting that the valuation got out of hand earlier in the year, as investors got overexuberant about what was an incredible 2020 for online sales growth.
Despite the magnitude of the decline, PYPL stock is still no bargain at over 45 times trailing earnings and 9.1 times sales. If PayPal can re-accelerate its growth in the new year, shares of PYPL could easily correct upwards. With all the competition moving into the fintech space, though, it’s hard to get behind the name.
Competition
It’s not just the rise of BNPL that could apply the pressure, but disruptors in the FAANG cohort could also make a bigger splash in the payments space, specifically Apple (AAPL) with its Apple Pay and Apple Wallet.
Further, the DeFi (Decentralized Finance) trend and other up-and-comers like SoFi Technologies (SOFI) could take a stride out of PayPal’s growth prospects and margins if it can’t continue to innovate while offering its users a better value proposition.
To offer more competitive fees while investing to stay on the cutting edge of innovation, profitability prospects are bound to take a hit at a time when the market is turning its back against the high-growth companies that promise most of their profits way into the future.
As such, PayPal will need to stay on its toes. In any case, a more competitive environment is not a great place to be in as an investor.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, PYPL stock comes in as a Strong Buy. Out of 32 analyst ratings, there are 26 Buy recommendations, five Hold recommendations and one Sell recommendation.
The average PayPal price target is $270.87. Analyst price targets range from a low of $190 per share to a high of $342 per share.
The Bottom Line on PayPal Stock
PayPal is a magnificent company that’s fallen on hard times.
With growth showing signs of weakening, the stakes are as high as ever. Sure, comparables were unfavourable and the firm continues to move on from its days of partnering with eBay (EBAY).
That said, it’s tough to gauge how much of recent pressure on revenue growth is poised to reverse and how much will worsen at the hands of rivals.
While the consumer spending environment could improve in 2022, competitive pressures could easily mount, as they look to steal PayPal’s share of the pie.
Don’t think that PayPal can’t put up a fight, though. It has a seasoned management team that could have some solutions up its sleeves. In any case, 2022 is shaping up to be a very interesting year for the fintech giant.
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Disclosure: Joey Frenette owned shares of Apple at the time of publication.
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