Market cautious on dirt-cheap PayPal

For the majority of PayPal analysts, the only way is up. Trouble is, the stock keeps going down.

About two thirds of the more than 50 Wall Street firms covering the digital-payments company has a buy or equivalent rating on the shares, according to data compiled by Bloomberg. And not one has a sell, the data show, something that cannot be said of Apple, Microsoft, or even the latest market darling, Nvidia.

Analysts were similarly bullish in mid-2021, when pandemic-fuelled revenue growth was pushing the stock to record highs. No-one predicted the 80% plunge that sent PayPal spiralling to a six-year low in late May. This time the market is treading more carefully.

Tejas Dessai, an analyst at Global X ETFs, said investors were “broadly sceptical of fintech names” given their sensitivity to the consumer economy at a time of high interest rates and inflation. “What makes things harder for PayPal is poor growth and continuous margin pressures,” he said.

While the stock is a 5.1% holding in the Global X Fintech ETF, the fund has been cutting its position since October 2022, data compiled by Bloomberg show.

The San Jose, Californiabased company has lost nearly $300bn in market value as revenue growth that was turbocharged during the Covid19 pandemic has slowed dramatically. The latest issue to rankle investors is sluggish profit margins.

Still, PayPal has one key attraction — it is dirt cheap. 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, according to data compiled by Bloomberg.

For some analysts, being cheap is not enough of a reason to buy.

“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,” said Logan Purk, an analyst at Edward Jones. He was one of three long-time bulls to downgrade the stock after PayPal’s margin forecasts for the full-year disappointed.

“PayPal continues to focus on its largest core accounts, which should help drive solid volume growth,” Purk said. “However this business tends to be lower margin. We question how long PayPal can offset margin pressures with its disciplined cost control.”