Shares of digital payments firm PayPal (NASDAQ: PYPL) have endured a painful decline over the past year. To many, PayPal was the blue-chip fintech firm that provided many a relatively “safe” way to play the hot trend of financial technology. Unfortunately, PayPal was one of the big-tech firms that crumbled. At its worst, shares of PayPal lost 78% of their value. That’s not the kind of decline you’d associate with a company that used to sport a market cap in the hundreds of billions. Though there aren’t too many catalysts to look forward to, I don’t think the battered stock needs much to move the needle higher over the coming months.
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PayPal never should have traded at the lofty multiple it commanded in the back half of 2021 or even 2020. While the valuation reset is the largest contributing factor behind the fall of PYPL stock, other issues make the name tough to get behind, even at these depths. The broader fintech market faded well before the rest of the stock market began to fall off its peak when the page turned in 2021. A significant reason for the fintech fumble is rising competition.
Sure, fintech is still one of the hottest trends in the tech space, but where there are substantial economic profits to be had, you can be sure competition will be hungry to gain a slice of market share.
Simply put, PayPal isn’t the only way to play the rise of digital payments anymore. Up-and-coming fintech firms (think the “Buy Now, Pay Later” IPOs over the last two years) and tech titans like Apple (NASDAQ: AAPL) want in on fintech.
Despite macro headwinds, few catalysts, rising competitive pressures, and negative momentum behind the stock, I remain bullish on PayPal. Most headwinds described have already had ample opportunity to weigh down the stock. I think the stock is too oversold here.
Apple is Shaping Up to be PayPal’s Biggest Rival
With rising interest rates applying pressure on the capital structures of medium-sized fintech companies, it’s Apple and other large- and mega-cap rivals that could pose the most significant threat to PayPal. Deep-pocketed firms like Apple have the network and cash to spend.
Further, Apple tends to find success when entering new market verticals. Also, of course, Apple has one of the better reputations on the Street. With such a privacy and user-centric focus, Apple arguably has a better reputation than the likes of PayPal. For that reason alone, Apple may be in a spot to take market share from PayPal over the next decade.
Now, PayPal has very smart people running the company. They can defend themselves against any rival. That said, Apple is just one competitor that nobody wants to compete against. Its size and brand power are its greatest strength. Of course, its brilliant managers (is there are better CEO than Tim Cook right now?) and massive cash pile help the cause.
In any case, PayPal finds itself in a tough spot, as digital payments face increasing pressure while firms like Apple continue adding to their arsenal of fintech products.
Apple’s latest fintech-related announcement sees it teaming up with Goldman Sachs (NYSE: GS) to launch a high-yield savings account. In prior pieces, I noted that the Apple Card was just the start of what could have been many fintech offerings to expect from the Apple-Goldman relationship. With a savings account and a popular credit card for which iPhone users can easily apply, Apple may be a more exciting fintech company than PayPal.
PayPal has its own high-yield savings account, with no monthly fees and services offered by another bank. However, I think better integration with the Apple ecosystem gives Apple an advantage over PayPal.
Though PayPal desires to have the go-to fintech app, the firm needs to go further to improve the state of its ecosystem and the reputation of its brand. Undoubtedly, Warren Buffett has long emphasized the importance of a good reputation in business.
Recently, PayPal did itself no favors with its misinformation policy that faced backlash. Indeed, PayPal claimed there was confusion regarding fines for users who promote misinformation. PayPal backtracked on the policy, but it’s too late. I think the reputational damage has already been done.
The thought of more fines or fees could lead PayPal users to second-guess their decision to leave funds in a PayPal account. PayPal may have shot itself in the foot with its questionable misinformation policy.
What is PYPL Stock’s Price Target?
Turning to Wall Street, PYPL stock comes in as a Strong Buy. Out of 30 analyst ratings, there are 24 Buys and six Holds.
The average PayPal price target is $120.61, implying upside potential of 42.26%. Analyst price targets range from a low of $90.00 per share to a high of $160.00 per share.
Conclusion: PYPL is in a Tough Spot but Has Potential
PayPal is in a tough spot as it clashes with Apple. With a sound balance sheet, I think an acquisition could help PayPal beef up its ecosystem. At the end of the day, PayPal needs to offer customers more value to sustain impressive growth in the face of rising rivals.
With competent management and a modest 3.7x sales multiple, I think the upside could be significant if the firm can get things right on the acquisition front.
