PayPal Holdings Inc (PYPL) suffered a discouraging start to the new year after an analyst slapped a rare “sell” call on PYPL stock because of increased competition.
It’s a tough way to kick off 2016, but fears that PYPL is set to fall behind the wolf pack of competition are overblown. Indeed, the analysts who downgraded PYPL to “sell” — something you almost never see — admitted that potential upside in the most recent quarter would make the rating cut “premature.”
Analysts at Monness Crespi Hardt explained that while PYPL’s peer-to-peer payments business remains the driver of growth, the company’s digital payments and app economy segments face stronger headwinds.
As the analysts said in a note to clients:
“The payments space has been far from static over the last six months and we see PayPal’s prospects diminishing relative to the rest of the field.”
With a price target of $32 a share, Monness Crespi Hardt implies that PYPL stock is set for a drop of around 12% from its Dec. 31 close in the next year or so.
Sure, there’s a bear case to be made for any stock, but Paypal stock is likely to make this one irrelevant.
Absolutely, PayPal is going up against some big competition. Apple (AAPL), Alphabet’s (GOOG, GOOGL) Google, Facebook (FB), Twitter (TWTR), Square (SQ), Walmart (WMT) and others are vying for a piece of the mobile payments pie.
PayPal Stock Is on the Offensive Too (PYPL)
And yet none of this means PYPL is preordained to lose. After all, everyone competing in the space faces formidable foes. And it’s not like anyone has gained traction or set itself apart. AAPL might — might — have the upper hand for the time being, but Apple Pay is far from a hit so far.
Meanwhile, PYPL has some distinct advantages.
For one thing, it’s a payments company first and foremost, with the infrastructure, customers, account relationships and brand identity that go with it.
Furthermore, PYPL is showing strength in mobile with its Venmo app. Venmo lets customers make instant payments with their smartphones using money from their Venmo accounts or through links to their banks or debit cards.
In the most recent quarter, transaction volume at Venmo tripled year-over-year. And that’s just one app. PayPal’s portfolio of payments solutions includes Braintree, Xoom and Paydiant, among others, giving it the benefits of both scale and network effects.
And even if PYPL has to share the pie, there’s plenty to go around. Consumers are expected to make more than $140 billion in mobile payments by the end of the decade, according to Forrester, a market research and consulting firm.
PayPal stock is forecast to have annual revenue of $9.2 billion in the most recent fiscal year. The payments company doesn’t need to grab much of the potential market in order for it to make a materially important contribution to its top line.
Bottom Line for PYPL Stock
After a mixed third-quarter report, PYPL needs to deliver on its fourth-quarter results when they drop later this month or in early February. Another revenue miss would put the bull case on PayPal stock up for reconsideration.
For now, it has at least as many competitive advantages as any of its rivals.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
