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PayPal Stock: Could Sink Further amid Analyst Downgrades
Stock Analysis & Ideas

PayPal Stock: Could Sink Further amid Analyst Downgrades

Shares of financial technology powerhouse PayPal (PYPL) have been tumbling for many months now.

Jeffries analyst Trevor Williams even moved the stock to Hold from Buy alongside a $200 price target, just $10 north of the Street-low target for PayPal stock.

The Jeffries downgrade came just days after that of BNP Paribas.

Undoubtedly, it’s quite convenient for an analyst to downgrade after a substantial fall in a stock. In any case, analyst downgrades seem warranted. I remain bearish.

More Downgrades Coming?

Williams does have some concerns that dip buyers may wish to weigh amid the stock’s sell-off. Most notably, Williams doesn’t see many catalysts that could propel PYPL stock back to its former glory.

As the e-commerce spending boom tapers off, PayPal could continue facing pressures from all corners.

Further, PayPal is not a cheap stock yet, even after its decline. Though cheaper than a few months ago, PayPal stock faces considerable downside risks should 2022 see more rate hikes than the market is currently pricing in.

JPMorgan top boss Jamie Dimon recently made headlines when he noted that more than four rate hikes could be in the cards for 2022.

Supporting such rate hikes could be a stronger economy and persistent inflation, which recently rose to a nearly 40-year high of 7% in the U.S.

There’s no doubt a more hawkish pivot from the Fed is necessary to pull inflation back down to Earth. With a robust economy, the Fed may very be positioned to hike away to tame inflation and what could be an overheating U.S. economy.

Perfect Storm of Negatives

PayPal and other high-multiple growth stocks could be punished further if Dimon is right and four rate hikes (or more) are in store for this year. While PayPal isn’t a speculative, unprofitable hyper-growth stock like the ones in Cathie Wood’s ARK basket of innovation funds, it is one of the pricier names in the Nasdaq 100, in my opinion.

At writing, PYPL stock trades at 9.1 times sales, 45.3 times trailing earnings, and around 35 times next year’s expected earnings.

With growth trends cooling off in the third quarter, I think it’s tough to justify paying up for the name. A further correction in expensive tech is also a serious risk for PayPal stock.

Add a lack of catalysts, potential for further analyst downgrades and competition from BNPL (Buy Now Pay Later) firms into the equation, and it certainly seems like the “perfect storm” is not yet over.

That’s not to say PayPal isn’t a great company. It is. The valuation is just too steep, and the stage is set for more turbulent times.

Undoubtedly, the acquisition of a social-media company could change that. Still, PayPal stock is likely to get punished further, as investors did not appreciate the short-lived pursuit of Pinterest (PINS) last year.

Perhaps PayPal’s intent to acquire at lofty market multiples is enough to keep the stock lower through 2022.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, PYPL stock comes in as a Strong Buy. Out of 33 analyst ratings, there are 26 Buy recommendations, six Hold recommendations and one Sell recommendation.

The average PayPal price target is $258.52. Analyst price targets range from a low of $190 per share to a high of $342 per share.

Bottom Line on PayPal Stock

Recent analyst downgrades suggest PayPal stock deserved to get punished as harshly as it did.

Unfortunately, the punishment may not be over quite yet.

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