Shares of PayPal Holdings Inc. are plunging toward their worst performance in more than 19 months after the company’s latest results and forecast reignited concerns over the company’s longer-term trajectory.
The stock
PYPL,
-11.55%
is off 11.7% in Tuesday trading, putting it on pace for its largest single-day percentage decline since March 16, 2020, when the stock dropped 15.8% to post its worst trading day on record.
The company’s preliminary outlook for 2022 seems to be weighing on shares, as PayPal currently is looking for about 18% revenue growth next year, while analysts were modeling upwards of 20% growth, according to FactSet.
Some analysts viewed the outlook as conservative given continued uncertainty around factors like the pandemic’s impact on travel spending, but at least one worried that PayPal’s challenges in the most recent quarter indicate longer-term issues.
PayPal’s latest results reinforced that the risk-reward balance on PayPal shares looks “neutral” for now, in the view of Needham analyst Mayank Tandon. Though he’s upbeat about PayPal’s longer-term opportunities in the world of digital payments, Tandon is concerned that PayPal still faces “headwinds” from its changing relationship with eBay Inc.
EBAY,
+0.61%
PayPal used to be eBay’s primary payments partner, but eBay is moving to its own managed system, and shifting volume away from PayPal as it does so. This dynamic is hampering PayPal’s volume and revenue growth.
Executives at PayPal emphasized that the expiration of the old eBay arrangement offers positives as well, such as a greater flexibility to pursue arrangements with other merchants. In that vein, PayPal announced Monday that its Venmo unit scored a win with Amazon.com Inc.
AMZN,
+2.20%
and will become a checkout option on the e-commerce giant’s site starting early next year.
Though a splashy headline, the arrangement may not move the needle much for PayPal, in the view of some analysts. “[W]e expect it to have a minimal impact on revenue over the [near term],” wrote Tandon, who has a hold rating on the shares.
Truist Securities analyst Andrew Jeffrey called the Venmo arrangement “nice but not thesis-altering.” In his view, PayPal needs to do more to position itself for the rebounding performance of in-store commerce.
“We submit PayPal is approaching e-commerce saturation, which we see as the
downside of ubiquity,” he wrote. “This explains the ill-fated Pinterest overture, in our view. We continue to argue the company should acquire a leading card-present processor.”
Jeffrey rates the stock at hold and he lowered his price target to $200 from $275 while arguing that PayPal’s slowdown is “likely more than transitory.”
Elsewhere, PayPal found defenders among the overwhelmingly bullish group of analysts who follow the stock. Of the 41 analysts tracked by FactSet who cover PayPal’s stock, 34 rate it a buy, while five call it a hold and two rate it a sell.
One of those bullish analysts is JMP Securities’ David Scharf, who took a more upbeat view of PayPal’s ability to get past its current issues. “Whether it is the planned roll-off of eBay volumes, macro pressures from the supply chain or COVID-19 issues, or lapping federal stimulus and credit reserve releases, all of the factors weighing on the year-end (and holiday season) and early 2022 guidance should dissipate as the company exits 2022,” he wrote in a note to clients.
He added that he “would not be surprised if we ultimately see an upward bias to top-line estimates as 2022 unfolds.” PayPal executives may have felt “snake bitten” after giving a more confident view of trends in July before factors like weaker travel spending dampened activity later in the third quarter.
Scharf also likes the new arrangement between Venmo and Amazon. “Venmo is now transaction margin positive, and while we do not have information about the pricing and unit economics of the AMZN deal, it is clear that the company’s monetization efforts this year have turned a corner,” he continued, while reiterating a market-outperform rating but cutting his target price to $260 from $300.
MoffettNathanson’s Lisa Ellis wrote that “the underlying ‘health’ of PayPal’s business remains strong,” noting some positive aspects of the company’s latest report, such as 25% revenue growth when excluding eBay as well as momentum for newer features like buy-now pay-later and crypto buying.
Still, she could see why investors may have felt uneasy after the earnings report. PayPal shares have struggled in recent weeks following reports that the company was considering a deal for Pinterest Inc.
PINS,
+0.30%
Though the company eventually said it wasn’t currently pursuing such a deal, and executives commented on Monday’s earnings call that they have a high bar for big deals, the company’s results and outlook may have brought up some of the same fears that investors had after hearing the acquisition rumors.
One concern that investors had following the Pinterest rumors was that PayPal was “seeing signs of underlying weakness in its core business and as a result is more willing to consider large deals than in the past,” Ellis wrote. Then PayPal’s outlook and some of its headline numbers in the latest quarter fell short of expectations, which “did little to allay” that concern, she continued.
Ellis rates the stock a buy and cut her price target to $320 from $350, though she called the recent selloff “a compelling entry a point into this long-term secular winner.”
Shares have declined 27% over the past three months as the S&P 500
SPX,
-0.43%
has risen about 6%.