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Fintech stocks had a mixed performance in 2023 as investors embraced a new normal of moderate growth, more competition, and thin margins. Some players like Affirm (AFRM) and Visa (V) jumped while companies like Adyen and PayPal (PYPL) struggled. PayPal stock price has crashed by over 20% in the past 12 months while the Nasdaq 100 soared by over 50%.
Analyst downgrades
One of the most popular Warren Buffett’s quotes is on the need for investors to be greedy when others are fearful. Most recently, this approach has worked well in companies like Meta Platforms, Netflix, and Roku.
In Meta’s case, there were concerns about iPhone’s upgrade that intensified security features. Netflix struggled amid concerns about competition while Roku investors feared the issue with market saturation and profitability. In the past 12 months, all these stocks have jumped by more than 50%.
PayPal stock price has retreated as several Wall Street analysts downgraded the company. The most recent downgrade came from Morgan Stanley’s James Faucette. In a note, he argued that the company’s progress on key imperatives has been slower than expected. He moved his rating from overweight to equalweight.
Before that, an analyst at Oppenheimer and Bank of America downgraded the company to market perform arguing that margin compression will likely continue. He also expects that unbranded volume growth will be 19% in 2025. BTIG analysts, on the other hand, downgraded the stock from buy to neutral, arguing that:
“We see the process of returning the company to consistent and profitable revenue growth as a multiyear initiative, rather than a FY24 story.”
What next for PayPal?
Sure, PayPal’s performance has been wanting for a while, with the performance of its unbranded – read Braintree – being disappointing. This division faces substantial challenges, especially competition from Apple Pay, Adyen, and Stripe. Braintree handles payments for the likes of Booking, Uber, and Adobe.
At the same time, PayPal’s user growth has been slowing. In the most recent quarter, the company said that its total active users slumped from 432 million to 428 million. While this is a bad thing, we need the context.
Like other payment companies, PayPal was growing at a fast pace before the pandemic. The Covid-19 pandemic and the lockdowns then supercharged this growth as people opted for digital transactions. Covid has now ended and people have moved to their new normal, which explains the retreat. What is important, however, is that the number of transactions rose by 13% YoY and the Total Transaction Volume (TPV) jumped by 15%.
The other reason why PayPal stock has underperformed is that it is still being valued as a growth stock. I believe that this is wrong. Instead, the company should now be valued as a value one because the era of double-digit growth is over.
A look at its valuation metrics shows that it is undervalued. It has a forward PE multiple of 12.25, lower than the sector median of 13. The S&P 500 index has a PE ratio of 20. Similarly, its forward EV to EBITDA multiple of 8.85 is lower than the sector median of 11.5. In terms of price to cash flow, its 12.95 ratio is lower than the sector median of 13.68.
With PayPal, investors seem to be ignoring other things. First, there is room for margin expansion in the coming months. I expect that the relatively new CEO will continue cutting costs and possibly exiting some unprofitable businesses.
Second, the impact of competition from the likes of Apple Pay has been a bit exaggerated. Besides, the two companies have co-existed for many years. Third, as a value play, the company has over 400 million active users, which it can continue monetising.
PayPal stock price forecast
Meanwhile, turning to the weekly chart, we see that the PYPL stock price has formed a falling wedge pattern, which is nearing its confluence. In technical analysis, this is one of the most popular bullish signs.
At the same time, volume has been high in the past few months, which is a sign of accumulation. Therefore, there is a likelihood that the stock will have a bullish breakout in the coming months. This breakout could start when the company publishes its earnings on February 7th.
The post PayPal stock price forecast: PYPL is a value investor’s dream appeared first on Invezz
