PayPal Holdings Inc.’s frank discussion of its business outlook came as welcome relief to analysts, many of whom wondered whether investors would be willing to give the shares a look again now that the company faces a new, lowered bar.
The payments giant cut its full-year outlook late Wednesday, while abandoning the medium-term forecasts that many had come to worry were disjointed from reality. The company pointed to a challenging macroeconomic backdrop and cited difficulties in forecasting e-commerce trends at the pandemic’s current stage.
new “kitchen sink” outlook could position its shares to outperform during the second half of the year, wrote Baird analyst Colin Sebastian. He acknowledged that consumer spending habits were changing, as people moved to spend more money on areas like fuel and travel instead of some of the product and service categories that are in PayPal’s wheelhouse, but he noted that the company’s comparisons should ease once it moves into the back half of 2022.
He maintained an outperform rating on PayPal but lowered his price target to $150 from $175 on the shares, which are up 11.7% in Thursday afternoon trading and on track for their largest single-day percentage gain since May 7, 2020, when they rose 14.0%. They’re still off about 15% so far in 2022, while the S&P 500 index
has declined about 10%.
Meanwhile, D.A. Davidson’s Chris Brendler wrote that PayPal’s stock looked “too cheap” for investors to abandon.
“While the guide down rightfully raise[s] more questions, we still see an incredibly valuable payments powerhouse with enviable digital payments franchise on a global scale,” he wrote. In his view, PayPal “took the opportunity to clear the decks (guidance assumes further macro worsening) and hopefully improve the cadence from here.”
He kept a buy rating on the stock but lowered his price target to $131 from $144.
Even bullish analysts acknowledged, however, that the path forward wouldn’t be easy for PayPal, despite a realignment of its expectations.
MoffettNathanson’s Lisa Ellis keyed in on PayPal Chief Executive Dan Schulman’s suggestion that PayPal needed to focus on doing especially well on a smaller subset of initiatives. That prompted her to wonder if PayPal could “return to mid-teens [percentage] revenue growth,” and meet its latest outlook, while pursuing a strategy of doing “‘fewer things, better.”
Ellis wrote that she was “cautiously optimistic” that PayPal would be able to grow its average revenue per user in support of its target for mid-teens revenue growth exiting the year, in part because the company still has ample room to get its current users to choose PayPal for more of their spending.
“However, we believe that achieving the requisite ARPU [average revenue per user] growth will require PayPal to make progress in penetrating in-store payments (e.g., with PayPal/Venmo cards), and/or online bill payment (e.g., gaining traction with the direct deposit and bill payment capabilities recently rolled out with the new apps) – expansion areas that will require an operational shift and re-focusing for PayPal,” she wrote, given the company’s focus on picking up new users and additional e-commerce market share in recent years.
Ellis has a buy rating on PayPal’s stock and lowered her price target to $150 from $190.
That PayPal’s shares were trading higher despite a cut to its outlook and yanking of medium-term guidance “demonstrates just how negative sentiment has become,” wrote Rosenblatt Securities analyst Sean Horgan.
“We lost a degree of confidence in management’s guidance and believe the company lacks a sense of clarity around its strategic direction,” he wrote. He argued, however, that “the upside risk simply outweighs the downside risk” given that PayPal’s stock is currently trading at prepandemic levels. The stock had closed Wednesday at $82.61, the lowest price since January 2019.
He maintained a buy rating on the stock, while cutting his price target to $180 from $216 in a note titled: “The Long Road of Rebuilding Begins.”
Now that the outlook has been reset, “the bigger question is will this guidance reduction result in a clearing event for the stock or represent something structurally wrong with the model,” wrote RBC Capital Markets analyst Daniel Perlin.
“Given the guidance reset, which we believe, all else equal, has helped to de-risk numbers for the remainder of the year, we now view the risk/reward as tilting positive, but acknowledge the company’s new strategy to pivot to engagement vs. pure [net-new active account] growth will have to deliver proof-points before we could see a meaningful rebound in the share,” he continued, while staying at outperform but lowering his price target to $110 from $118.
PayPal’s reset wasn’t enough to sway SMBC Nikko Securities America analyst Andrew Bauch, who kept his underperform rating on the stock and remained the only analyst out of the 50 tracked by FactSet to have a bearish rating on PayPal.
“While the actions taken by management last night are a step in the right direction, the reality is that trust is gained in drops and lost in buckets; and suspect it will take several quarters of consistent beat and raises for many long-term investors to regain confidence,” he wrote in his note to clients.
Bauch also had questions about PayPal’s lowered outlook, as the company’s management team called out the impacts of issues like inflation and supply-chain constraints. Fellow payments players including Visa Inc.
and American Express Co.
said in recent days that they weren’t seeing inflation hurt spending volumes.
“[I]n light of another strong quarter from the networks, in our view, we believe that management did not effectively reconcile the differences between their commentary (as it relates to macro) and the commentary of said peers, who are not seeing material macro headwinds as of yet,” he wrote, while keeping an underperform rating on the stock and lowering his price target to $90.