PayPal Holdings Inc. is showing momentum with efforts to modernize its platform, but the company faces too many challenges for Evercore ISI analyst David Togut to feel confident about its stock.
He downgraded PayPal shares
PYPL,
to in-line from outperform late Thursday, a day after the company showed continued pressure on transaction margins in its second-quarter earnings report.
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“The likely continued rapid growth of low-take-rate and transaction-margin Braintree should sustain negative year-over-year transaction-margin pressure,” Togut wrote. Plus, the “recent emergence of growing credit losses on PYPL’s business loan book raises the possibility of another increase in loan-loss reserves over the next year.”
While PayPal shares opened higher Friday, they were recently off 0.8%, following a 12.3% plunge sustained in Thursday’s session. The stock was on track to extend its losing streak to a fourth trading day.
In Togut’s view, the company lacks “a clear path” to expansion of its transaction margins on a year-over-year basis, meaning there’s “limited scope for earnings outperformance even as branded PayPal wallet volume growth accelerated for the months of June…and July.”
He cut his price target to $65 from $85 in his latest report.
Togut also worries about competition in the market, writing that “with Apple Pay becoming more prevalent at online checkout, while offering 1-click checkout, consumers have more alternative ways to pay versus PayPal.”
Chief Executive Dan Schulman told MarketWatch Wednesday that he expected PayPal’s branded checkout business to grow at or above the rate of overall e-commerce growth going forward.
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