The Ratings Game: PayPal stock dips on weak outlook, but analyst says to look past the modest ‘distractions’

There is plenty of uncertainty ahead for PayPal PYPL, -2.57%, wrote MoffettNathanson analyst Lisa Ellis in a note titled, “Is this the end, or the beginning?” The company continues to face weakness in the travel and events vertical, it’s seeing a credit slowdown that could persist into next year, and former corporate cousin eBay Inc. EBAY, +2.16% is in the midst of moving from PayPal to its own managed payments platform, a transition that’s happening more quickly than expected.

These are among the reasons why PayPal declined to provide an early window into 2021 expectations when the company reported third-quarter results Monday. In normal times, the company’s “early look” into the new year is among the high points of PayPal’s September-quarter earnings call.

Still, Ellis continues to have a positive view on PayPal coming out of the company’s call, despite the challenges brought on by eBay and the pandemic. “PayPal is rapidly rolling out major new wallet functionality: installment lending, crypto investing, and bill payment, to name a few,” she wrote, while maintaining a buy rating and $220 price target. “And, there are plenty of reasons to believe the pandemic-triggered acceleration of e-commerce will persist.”

PayPal shares are off 1.9% in Tuesday afternoon trading. They had been down as much as 7.3% in Monday’s after-hours market.

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Wolfe Research analyst Darrin Peller pointed to similar unknowns around eBay and the pace of economic recovery, though he also expressed an upbeat view of PayPal’s trajectory. Comments from the call on growing engagement, new feature rollouts, and an expectation for eBay headwinds to wind down after 2021 were “all leading to management’s confidence that ‘we are clearly on a trajectory to deliver stronger long-term growth than our previously guided medium-term outlook of 17% to 18%,’” he wrote.

Peller argued that there could be “near-term visibility questions” lingering until February, when PayPal is expected to update its medium-term forces, but he said that the stock pressure after earnings leads to an “attractive entry for long-term fundamental investors.”

He rates the stock at outperform.

Macquarie analyst Paul Golding took a balanced view of the latest report, while also reiterating an outperform rating and $230 target price. “Overall a solid quarter, but the significant drop in take rate and the conservative guidance provide some overhang to the strong growth trajectory detailed on the call, including the new product initiatives expected to make a medium-term impact,” he wrote. “For now though, we remain encouraged by PayPal’s strong user growth amid the continued shift towards digital payments.”

Susquehanna’s James Friedman noted that the company’s strong third-quarter results didn’t necessarily flow through to the fourth-quarter outlook.

PayPal’s fourth-quarter outlook “includes increased expenses and a sharper attrition of eBay volumes, so despite the big Q3 the Q4 guidance landed below the Street,” he wrote. “But we believe these are important — but modest — distractions, and PayPal is executing well to expand its consumer and merchant acceptance, with enhanced functions that will help make their wallet increasingly universal. Ultimately, the stock should follow.”

He maintained a positive rating and $235 price target.

For Needham analyst Mayank Tandon, the results helped justify a neutral view of the stock. He keyed in on PayPal’s new expectations for Venmo, including that the service could generate $900 million in revenue next year and be profitable in 2022.

“We believe that the recent update on Venmo further validates our view that it will be several years until Venmo is a meaningful contributor to revenue/EPS growth,” he wrote, while keeping his hold rating on the stock.

PayPal shares have gained 70% so far this year, as the S&P 500 SPX, +1.83% has risen 4.4%.