By Emily Dattilo
PayPal Holdings stock slipped Monday following a downgrade from an analyst at Raymond James who says the fintech's margins are at risk from changes in the online payments business.
Raymond James analyst John Davis lowered his rating on PayPal stock (ticker: PYPL) to Market Perform from Outperform in a research note Monday.
Davis believes the company will succeed in trimming costs and surpassing its financial forecasts for 2023, but is uncertain how the company's margins will fare beyond that with cost cuts "in the rearview mirror" and as it grapples with a decline in branded checkouts and an uptick in unbranded.
PayPal said it doesn't comment on analysts' research notes.
The company, a Barron's stock pick in early August, offers two different checkout methods for retail websites: branded and unbranded. Branded involves the yellow PayPal button, while unbranded is payment processing completed "behind the scenes," for companies like Uber Technologies, DoorDash or Ticketmaster, a spokesperson said via email.
An unbranded checkout means less dollars for PayPal than branded because it involves other companies, which then take a piece of the revenue. The analyst predicted that PayPal's coming financial results will show a 1% decline in reported revenue from branded checkouts for 2022, with growth of 41% for unbranded.
The outlook for PayPal's margins is uncertain as less-profitable unbranded transactions come to account for a larger share of the total, he said.
Davis added that PayPal likely lost market share to Apple Pay during the Cyber Week shopping season in 2022, according to data from Salesforce. PayPal's processed payments declined 6% year over year, while Apple Pay's soared 63%, he said.
"We are moving to the sidelines given our view that significant multiple expansion will likely prove difficult at a time when share loss is driving the narrative for the stock," Davis wrote.
James Faucette, an analyst at Morgan Stanley, is more upbeat on PayPal and has his own take on the company.
"While we acknowledge that Apple Pay has been growing its consumer usage quickly and expanding faster than PayPal, we think the impact to PayPal's ability to keep growing above the rate of overall eCommerce has thus far been limited," Faucette wrote in a research note Feb. 1.
"We think PayPal needs to keep expanding its wallet functionality to defend its competitive advantage in online checkout and ensure users keep engaging on the platform," he wrote.
The company will report earnings for the fourth quarter on Thursday, and Davis anticipates "a modest top and bottom line beat." He also expects management's forecast of full-year 2023 revenue will be lower than Wall Street expects, saying its earnings guidance likely will be in line with expectations, aided in part by savings from layoffs.
PayPal shares fell 3.3% to $82.72 on Monday. Over the last 12 months, the stock has dropped by about 32%.
Write to Emily Dattilo at emily.dattilo@dowjones.com
(END) Dow Jones Newswires
February 06, 2023 12:47 ET (17:47 GMT)
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