Paypal's Stock Was Downgraded Despite This Year's Strong Rally

Shares of PayPal Holdings Inc. have surged 33% so far this year, but Bernstein analyst Harshita Rawat has decided to end her bullish stance on the stock. In a note to clients, she explained that although PayPal is making strides with its product development, there are still concerns about increasing competition, particularly related to its core checkout button, which remains more expensive compared to alternatives.

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As of Wednesday’s market close, PayPal shares had already exceeded Rawat’s previous price target of $75. With the stock closing at $81.65, Rawat doesn't foresee much further upside. Consequently, she raised her price target slightly to $80 but downgraded her rating from outperform to market-perform on Thursday morning. In premarket trading Thursday, PayPal shares dropped by about 2%.

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Rawat described PayPal’s current stock trajectory as uncertain, citing a mix of positive and negative factors that could influence future performance. On the downside, she pointed to the intense competition facing PayPal’s core checkout service. On the upside, the company has been engaging in shareholder-friendly activities such as stock buybacks and reducing operating expenses.

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The analyst also noted that the future for PayPal involves a “wider-than-usual range of long-term outcomes.” Investors will need to carefully evaluate several key issues, including the long-term health of PayPal’s core checkout business, the success of new growth initiatives, and how recent pricing changes at its unbranded Braintree division could affect its prospects.

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One area where PayPal is placing significant focus is on the continued monetization of its popular peer-to-peer payment platform, Venmo. At the same time, the core PayPal business has introduced several new products, such as its Fastlane guest-checkout technology, which aims to streamline the checkout process, and a new advertising campaign promoting rewards available on PayPal-branded credit cards.

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However, Rawat expressed uncertainty about whether these efforts will meaningfully shift consumer preferences or significantly boost PayPal’s gross profits. Specifically, she highlighted that it might take several years before PayPal experiences the "network effects" from its Fastlane technology, and that success is far from guaranteed. In the meantime, Rawat believes that PayPal could face headwinds from rising interest rates, which could negatively impact gross profits heading into 2025.

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The uncertainty surrounding PayPal’s future is compounded by its competitive environment. The payments industry is evolving rapidly, with rivals constantly emerging and innovating, which may affect PayPal’s pricing power and market position. Still, Rawat acknowledged some positive developments under the leadership of Chief Executive Alex Chriss, who has been in his role for just over a year. She noted improved product development and execution since Chriss took over, though she remains cautious about the company’s long-term trajectory.

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Last month, Chriss discussed the company’s progress with MarketWatch, expressing optimism about PayPal's future. He highlighted that PayPal's unique position as a two-sided platform — serving both merchants and consumers — presents opportunities for strong network effects. According to Chriss, this ecosystem could eventually create significant value for the company, even if investors haven’t fully recognized it yet.

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Rawat’s downgrade of PayPal comes at a time when the company is navigating several challenges and opportunities. On the one hand, PayPal has successfully expanded its product offerings, increased shareholder returns through buybacks, and cut operational costs. On the other hand, competitive pressures remain a significant risk, particularly in its core business of online checkout, where rivals offer lower-priced alternatives.

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Moreover, while initiatives like Fastlane and Venmo monetization show potential, their ability to drive meaningful growth remains uncertain, and it could take time before these efforts significantly impact PayPal’s bottom line. As Rawat mentioned, even if these projects succeed, it may take years before the company fully realizes their potential benefits.

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Additionally, PayPal’s exposure to rising interest rates adds another layer of complexity. Higher interest rates could pressure the company’s profitability, particularly if it impacts consumer spending or increases costs related to financing and capital allocation.

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In conclusion, Rawat’s decision to downgrade PayPal reflects the mixed signals surrounding the company’s future. While PayPal is making progress in some areas, including product innovation and cost management, it faces significant challenges in the form of stiff competition, uncertain outcomes for new initiatives, and macroeconomic factors like interest rates. Investors will need to weigh these factors carefully as they assess PayPal’s long-term potential.

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