Shares of top-tier payments play PayPal (PYPL) are having a hard time finding a bottom these days, with shares continuing to add to the losses on a far-too-frequent basis. Indeed, PayPal isn’t the only payments player in town anymore.
From hungry up-and-comers like SoFi (SOFI) with neobank ambitions to BNPL disruptors like Affirm (AFRM), the space is starting to get crowded, and PayPal is going to need to take its innovative offerings to the next level if it’s to stay ahead of the pack and regain its once premium valuation again.
Further, big tech and the “disrupted” big banks are going to be eager to invest heavily in their fintech capabilities, potentially pressuring incumbent fintech companies like PayPal further. For now, I am neutral on PYPL stock.
The Fintech Industry Is Moving Fast: Can PayPal Keep Up?
Indeed, the fintech space was ripe for disruption. PayPal, one of the original fintech disruptors, now runs the risk of being disrupted if it fails to innovate. The stakes are higher now that other fintechs are broadening their focus on a broader range of financial offerings.
Ultimately, I do think the industry is becoming more bank-like. SoFi’s regulatory approval to become a bank shines a bright light on what could be the next step for the field.
Although PayPal previously noted it has no desire to become a bank, I do think it has reasons to change its mind, especially if more tech-first payments and financial service firms look to become more bank-like, while the big banks look to become more tech-like to defend their turf.
The financial industry is ripe for disruption. However, it will not be disrupted without a fight. While I do think PayPal can stay on its toes, I’m not so sure the stock is cheap enough, even after having nearly two-thirds of value slashed off its market cap.
The stock trades at 30.2 times trailing earnings at writing. That’s close to the cheapest PYPL stock has been in a very long time. With the broader fintech industry slapped with such a vicious valuation reset, though, it’s more apparent that fintechs should have never been driven as high on the back of temporary pandemic tailwinds.
Moving ahead, PayPal is ready to innovate and move past its eBay (EBAY) days. With the PayPal super app being rich with new features, the million-dollar question is whether such an offering can help the stock regain its former glory or if its offering will fail to differentiate PayPal from the rest of the pack. One thing is clear: the scarcity premium is all but gone.
The Case for Getting a Bank Charter
PayPal has done a remarkable job of thriving in the shift towards e-commerce. Even without eBay, I think the company can thrive. Online payments are the future, and Honey is an intriguing offering that can help keep PayPal competitive and differentiated as rivals look to move in.
Indeed, PayPal’s e-commerce (or social commerce) stance could pay off in a big way, as it looks to take a different growth pathway from the likes of a SoFi. Will acquiring a social-media company like Pinterest (PINS) be the right way to go, though? Or, should the firm grab a charter to obtain all the perks of becoming a national bank?
With Apple (AAPL) spending considerable amounts on its wallet and payments business, the path of a neobank could be more prosperous as PayPal looks to adapt to the new age.
Although becoming a bank will accompany a lot of extra paperwork and regulatory hurdles, I do think that the benefits could outweigh the costs. Arguably, consumers would have far more peace of mind keeping considerable sums of cash stored at a national bank as opposed to their PayPal accounts.
I think SoFi is on the right track, with its intent to become a neobank, and I think it will be very successful as it brings the best of both worlds (banking and tech) together. As for PayPal, don’t expect it to follow SoFi anytime soon. Its intent was clear when it went after Pinterest. It wants to capitalize on the next leg of growth in e-commerce.
SoFi’s growth trajectory seems clearer, although there is a risk of multiple compression, given banks don’t tend to boast high price-to-earnings multiples, to begin with.
Wall Street’s Take
Turning to Wall Street, PYPL stock comes in as a Moderate Buy. Out of 37 analyst ratings, there are 27 Buys, nine Holds, and one Sell recommendation.
The average PayPal price target is $184.42, implying an upside of 74.2%. Analyst price targets range from a low of $125.00 per share to a high of $245.00 per share.
The Bottom Line on PayPal Stock
PayPal has suffered such a massive fall from grace. Still, the stock seems more fairly valued than undervalued, given uncertainties regarding its plans moving forward.
Building upon its super app (think cryptocurrency trading, BNPL, and other cutting-edge functionality) could help fuel growth. With an eye for a prize in the social media space, PayPal’s road ahead looks intriguing. That said, it will not be without its fair share of risks.
Investors must ask themselves how PayPal can differentiate itself from the pack. At the end of the day, the tech stock needs unique innovations to fully leverage its strong network.
For now, I think SoFi’s neobank strategy offers more in the way of clarity than PayPal. However, this could change as the company continues to enhance its super app’s feature set.
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