PayPal Holdings Inc. is about to embark on its next chapter with a new chief executive set to start soon, but one analyst isn’t convinced the company will be able to break from the challenges of its recent past.
SVB MoffettNathanson analyst Lisa Ellis cut her rating on PayPal shares
PYPL,
to market perform from outperform Monday, writing that she expects the company to continue to see “lackluster” gross-profit growth under Alex Chriss, who is set to assume the CEO role Sept. 27.
“[W]hile we are excited for the fresh start at PayPal under new CEO Alex Chriss, we
believe it will, unfortunately, likely continue to be a challenging road ahead for the company in the coming year,” she wrote, lowering her target price on the stock to $75 from $85.
Ellis said she worries that PayPal’s market share for its high-margin branded checkout business “is eroding,” particularly as Apple Inc.’s Apple Pay makes advances.
“We consider this rapid competitive encroachment by Apple Pay to be the single biggest competitive threat PayPal faces, and the most critical issue for PayPal’s new CEO to tackle,” she wrote.
The company has been picking up volume share with its unbranded Braintree business, but that has come with a drag on margins.
“Looking forward, given the competitive intensity of the U.S. Large Enterprise merchant acquiring market, we expect the contribution of unbranded checkout to PayPal’s gross-profit growth to remain limited, i.e., we expect that PayPal will need to keep pricing low to retain volume share (and will likely lose volume share if PayPal increases prices),” Ellis explained.
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Ellis said she also worries about the company’s Venmo peer-to-peer platform, saying that volume growth for this part of the business “has flattened, likely due to competitive pressure from Block’s Cash App, and the Venmo monetization narrative.” The monetization potential of Venmo has been part of the PayPal bull case for years, but Ellis said she no longer believes it is a “likely source of upside for the stock.”
Though PayPal has had success reducing costs within its business over the past year, Ellis said she is concerned about what will happen as the company laps the benefits of its cost-cutting efforts.
“[W]hile we expect PayPal to continue delivering operating leverage, PayPal will no longer see the same level of [earnings-per-share] benefit that it has over the past 12 months while the cost program has been underway,” Ellis wrote.
Wall Street seems “cautiously optimistic” about Chriss’ appointment, according to Ellis, but she notes that he’ll have to get to work fast to fill various vacancies in PayPal’s executive ranks. “We consider Chriss’ ability to attract top talent to be his first and foremost challenge as PayPal’s new CEO,” she wrote.
Read: Who is Alex Chriss? 5 things to know about the next CEO of PayPal.
Further, he’ll have to “navigate investor fatigue with PayPal’s elevated level of stock-based compensation, which has been >$40,000/person for the past four years in a row,” Ellis added.
Shares of PayPal are off about 2% in morning trading Monday. They’ve lost about 12% so far this year as the S&P 500
SPX
has advanced 16%.
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