Stocks of Paypal Get Downgraded as Earnings Growth Becomes Harder to Predict

PayPal Holdings Inc. has recently outlined its 2024 outlook, signaling a year of transition, prompting one analyst to adopt a more cautious stance on the stock. According to Daiwa Capital Markets analyst Kazuya Nishimura, it has become challenging to foresee growth in earnings per share (EPS) for PayPal in the medium and long terms until specific developments come to fruition.

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Nishimura asserts that the company needs to demonstrate a tangible uptick in transaction-margin dollars and illustrate the positive impacts of its increased investments before meaningful bottom-line growth can occur.

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In light of PayPal's projected focus on executing its plans in 2024, Nishimura anticipates that it will take some time for service enhancements to manifest in earnings, making it potentially difficult to discern the growth potential for EPS in the medium term.

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Consequently, he downgraded PayPal's stock from buy to neutral on Monday, concurrently lowering the price target from $64 to $62, with the stock closing at approximately $60 on that day.

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Despite expressing the belief that there is a greater upside risk than downside risk in terms of earnings, Nishimura recognizes PayPal's stock as undervalued. He notes that the company's guidance appears conservative, leaving room for considerable potential overshooting, but at present, he lacks the conviction to factor in sharp upside.

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Over the past three months, PayPal shares have seen a modest increase of about 10%. However, it is noteworthy that the stock has undergone a significant decrease, nearly halving in value over a two-year period. This downward trend has prompted Nishimura to take a more cautious stance, downgrading the stock even as he acknowledges the potential for earnings to outperform expectations.

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Furthermore, the broader sentiment among Wall Street analysts has shifted concerning PayPal. In February 2023, almost 75% of analysts tracked by FactSet rated the stock as a buy. Presently, this proportion has declined to just over 45%, indicating a notable reduction in the stock's bullish backing among industry experts.

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As the company navigates its transitional phase in 2024, uncertainties surrounding the realization of planned improvements and their subsequent impact on earnings have led to a more subdued outlook from analysts, reinforcing the challenges PayPal may face in reestablishing its growth trajectory in the eyes of investors.

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