PayPal Holdings Inc. was already in the middle of a business transition, and now the changing macroeconomic climate adds a new component to the financial technology company’s ability to achieve its aims, according to an analyst.
Bank of America’s Jason Kupferberg downgraded the stock to neutral from buy Wednesday, citing both macroeconomic reasons and company-specific challenges.
“We find it increasingly difficult to recommend investors add to positions” in PayPal
PYPL,
+5.61%,
he wrote in his note to clients.
PayPal is in the midst of a transitional period as the company focuses on generating greater engagement from its higher-value users instead of spending up to retain inactive users who might not be inclined to interact much with the service. The company now must undergo this transition while dealing with an evolving macroeconomic landscape, Kupferberg wrote.
The company recently disclosed that it was suspending its services in Russia following the invasion of Ukraine. While Russia and Ukraine only made up about 0.5% of PayPal’s revenue in 2021, Kupferberg is concerned about the broader impact of the conflict on European spending, as Bank of America’s economist has lowered forecasts for growth in Europe’s gross domestic product.
PayPal “is geared more to discretionary consumer spending” than both Visa Inc.
V,
+4.20%
and Mastercard Inc.
MA,
+4.39%,
in Kupferberg’s view.
See also: Visa, Mastercard say they will suspend Russia operations
He expects better revenue growth in the second half of 2022 than in the first, but concedes that “the magnitude of this 2H acceleration is still unclear, which could lead to shares trading sideways in the near-term pending better visibility.”
While he worries about some near-term challenges, Kupferberg still likes PayPal’s business.
“In our view, PYPL’s business is not broken,” he wrote. “In hindsight, the company overestimated the sustainability of tailwinds induced by the pandemic and related stimulus, but we believe PayPal retains a robust competitive footprint.”
He thinks execution is “even more critical” for PayPal as it works through its business transition with the new macro backdrop, and he recommends that the company hire a chief operating officer—”ideally someone with significant technology/product experience.”
Bill Ready, the company’s last chief operating officer, left the company at the end of 2019, and PayPal thus far has opted against installing someone new in the role.
Despite the downgrade, PayPal shares are up 4.9% in Wednesday trading, amid a broad-market rally. They’ve lost 48% over the past three months as the S&P 500
SPX,
+2.57%
has slipped 8.5%.