PayPal: Addressing The Analysts

Summary

• PayPal shares have been on the decline recently and dropped over 4% from a downgrade from Bernstein.
• PayPal faces large competition in the payments industry, but is still one of the top performers.
• New products and partnerships could push the stock higher, but the new Omicron variant could cause trouble.

Erikona/iStock Unreleased via Getty Images

PayPal Holdings Inc. (NASDAQ:PYPL) recently received a downgrade from Bernstein. The analyst stated that multiple factors could cause disruptions to the company and it could lose its status as one of the top performers. However, PayPal continues to grow rapidly and is expanding through the creation of new services and strategic partnerships, as well as still maintaining one of the top platforms for payments.

Why Did Bernstein Downgrade PayPal?

On November 17, Bernstein downgraded PayPal from a buy to hold and reduced the price target from $260 to $220. The report stated that PayPal is facing multiple risks that could cause disruptions for the company.

The first reason Bernstein downgraded PayPal is the rise of e-commerce platforms, such as Shopify (SHOP) and Amazon (AMZN). The analyst stated that it is becoming increasingly more likely that Shopify is going to launch its own payment system, therefore negating the need for PayPal. As for Amazon, it is going to start accepting Venmo as a payment option in 2022, but Venmo may lack efficient monetization.

Furthermore, the analyst claimed PayPal is "under siege by a thousand cuts" from competitors such as Apple Pay (AAPL) and Square's Cash App (SQ). The increasing popularity of Buy Now, Pay Later apps such as Affirm (AFRM) and Klarna (KLAR) are also concerning to Bernstein. Square is becoming an even larger threat to PayPal by joining the Buy Now, Pay Later strategy by acquiring Afterpay for $29 billion.

Overall, Bernstein states that PayPal is in a worse position than its competitors currently, as the company has to defend a top spot in the industry.

The Threat of E-Commerce

While Shopify has been growing at an impressive rate, PayPal is still a large player in e-commerce payments. Recently, PayPal partnered with Wix (WIX) to allow merchants to offer PayPal payment options on e-commerce sites.

The two options listed on Wix e-commerce sites are PayPal Pay in 4 and PayPal Credit. PayPal Pay in 4 is PayPal's version of Buy Now, Pay Later. Through this program, consumers can split purchases into 4 interest-free equal payments made every two weeks. PayPal Credit offers 6 months of special financing on purchases of over $99.

PayPal is also mitigating the risk of e-commerce competition by launching in-store payment systems. The company recently launched the Zettle Terminal for POS solutions in small businesses. The Zettle Terminal is currently available in the UK and will be released to other parts of Europe during the rest of 2021 and 2022. This product also directly competes with Square's POS systems and adds into PayPal's current portfolio of POS products.

Overall, PayPal is still showing strength in the e-commerce industry by making a strategic partnership with Wix. Furthermore, the company is mitigating this risk by continuing its expansion into retail POS systems.

Venmo is Still Growing Rapidly

Bernstein stated that Venmo is having trouble monetizing its services. However, Venmo has recently overtook Cash App in total payment volume and is on a rapid trend.

Source: Business of Apps

It is also important to note that Cash App made the majority of its revenue through cryptocurrency transactions. According to Business of Apps, 76% of the app's total revenue came from Bitcoin (BTC-USD). In April, Venmo added the ability to buy cryptocurrencies through the app. If Venmo follows the same trend as Cash App and cryptocurrency remains popular among users, it can be assumed that Venmo will also benefit greatly from this addition.

Venmo also makes revenue through fees charged on business profiles. On any transaction of over $1, Venmo charges a seller fee of 1.9% + $0.10. With over 2 million merchants accepting Venmo in the United States (and growing), the seller fee should continue to drive revenue higher for Venmo.

Venmo also raised its instant transfer fee from 1% (minimum of $0.25, maximum of $10) to 1.5% (minimum of $0.25, maximum of $15). This puts the company at the same rate as Cash App. This rate can also be easily increased higher to adjust for inflation or other costs. With Venmo users consistently increasing at a fast pace, the app can expect to increase its generated revenue from instant transfer fees over the coming years.

Source: Business of Apps, Author's Chart

All in all, Venmo continues to find efficient ways to generate more revenue and is continuing to grow at a faster rate than competitors.

PayPal's Buy Now, Pay Later Plans

Even though Square is acquiring Afterpay, PayPal has its own plans for Buy Now, Pay Later options. As mentioned earlier, PayPal offers PayPal Pay in 4 and PayPal Credit. Both are direct competitors of Afterpay. These options are growing rapidly among consumers, and even saw a 400% year-on-year rise in volumes during Black Friday. The service had over 1 million first-time users in November and is continuing to accelerate.

PayPal has also announced the acquisition of Paidy, which is a leading provider of Buy Now, Pay Later services in Japan. This strengthens PayPal's relevance in Japan, which holds the third largest e-commerce market in the world. This demonstrates PayPal's strive to maintain its market leadership through strategic acquisitions.

I'd also like to restate the partnership with Wix. As mentioned earlier, PayPal partnered with Wix to offer Buy Now, Pay Later options for Wix e-commerce sites during the holidays.

All of these combined shows that the rise of Buy Now, Pay Later options are highly benefitting PayPal and not just the company's competitors.

Valuation

Due to the downgrade, the rise of the Omicron variant, recent earnings reports, and other news, PayPal's share price has decreased drastically. This may present a great discount for investors who are interested in the stock. By using analyst estimates for FY22 and applying calculated ratios from a comparable companies' analysis, PayPal could be severely undervalued.

By averaging EV/Revenue, EV/EBITDA, P/E, and P/S price targets, a fair value of $253.24 can be calculated. This implies a potential upside of 37.68%.

Source: Created by Author

It is also important to mention that the downgrade lowered Bernstein's price target to $220. At this price target, PayPal still has a potential upside of nearly 20%.

What Should Investors Do?

The downgrade from Bernstein claimed that PayPal has to defend its position from its competitors due to rising e-commerce giants, Venmo monetization concerns, and the increasing popularity of Buy Now, Pay Later options. However, PayPal continues to strengthen its e-commerce presence through partnerships with e-commerce merchants and mitigates the risk through the creation of retail POS services. Also, Venmo continues to be a leader in the payments industry and is outperforming Cash App in terms of payment volume and total users. Finally, PayPal Pay in 4 and PayPal Credit are increasing in popularity at an impressive rate, and the company is making strategic acquisitions of top players in the industry. Combine this with PayPal's current discount, and I believe it is appropriate to give a bullish rating to the stock.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of PYPL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.