Investors Struggle to Remain Bullish on PayPal Holdings

Despite shares of PayPal Holdings (PYPL) dropping to a 5-3/4 year low late last month, analysts are still bullish on the stock.  According to Bloomberg data, about 66% of the more than 50 Wall Street firms covering the company have a buy or equivalent rating on the stock, and not one has a sell rating.  Nevertheless, PayPal Holdings is down more than -10% this year and nearly 80% from its record high in July 2021. 

Some analysts are becoming concerned about future growth for PayPal Holdings as consumer spending has retrenched due to high inflation and interest rates.  Global X Fintech ETF has been cutting its position in PayPal since October last year and said, “What makes things harder for PayPal is poor growth and continuous margin pressures.”  Also, investors are “broadly skeptical of fintech names,” given their sensitivity to the consumer economy at a time of high-interest rates and inflation.

One key attraction of PayPal Holdings is its attractive valuation relative to its peers.  At 12 times projected profits, the stock is trading at a record-low valuation and is cheaper than 90% of the companies in the Nasdaq 100 Stock Index ($IUXX) (QQQ).  However, despite its low valuation, not all are rushing to buy PayPal.  Edward Jones said, “Given the change in interest dynamics combined with slowing growth, we don’t see PayPal regaining peak price-to-earnings multiples seen during the pandemic.”

PayPal Holdings rallied sharply during the pandemic to a record high as consumers stayed at home and shopped online.  However, revenue growth for the company that was turbocharged during the pandemic has slowed dramatically.  PayPal Holdings retreated last month after the company said its adjusted operating margin, which measures how much profit a company makes on each dollar of sales without using accepted accounting principles, is likely to expand 100 basis points this year, lower than an earlier forecast of growth of 125 basis points.

Like many of its e-commerce rivals, PayPal Holdings has been dealing with a slowdown in volume on its many platforms as consumers returned to in-store shopping.  In Q1 this year, PayPal cut 2,000 staffers, citing the macroeconomic slowdown that has weighed on the company’s bottom line.  Those job cuts and other restructuring costs cost the company $117 million in Q1.  Edward Jones, one of the few analysts who have downgraded PayPal Holdings, said, “The company continues to focus on its largest core accounts, which should help drive solid volume growth.  However, this business tends to be lower margins, and we question how long PayPal can offset margin pressures with its disciplined cost control.”

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.