Shares of digital payments specialist PayPal (NASDAQ:PYPL) suffered a conspicuous hit on Tuesday amid rising skepticism over its core business. Specifically, Mizuho analysts downgraded PYPL stock to “neutral” from “buy,” citing stiff competition in the buy now, pay later (BNPL) space. However, the relatively de-risked profile of PayPal compared to prior levels could attract bargain hunters.
According to Seeking Alpha, Mizuho raised warnings about the payment technology firm facing major competitive obstacles, especially from Apple (NASDAQ:AAPL). In addition, other companies offer BNPL financing options, which may crimp PayPal’s market share. Analyst Dan Dolev wrote in a research letter to clients that PayPal’s “market share loss to Apple Pay looks increasingly challenging.”
To be fair, Dolev acknowledged that PayPal’s Venmo app “has long been considered the crown jewel of US P2P (peer-to-peer payments).” Nevertheless, the company has struggled to improve its monetization protocol. Simultaneously, the rising popularity of alternative P2P services like Zelle presents “significant hurdles.”
Granted, analysts shy away from issuing outright sell recommendations, in large part because they wish to maintain friendly relations with the upper management teams of companies that they cover. So, Mizuho’s assessment of PYPL stock was measured.
Notably, the firm stated that PayPal may recover market share loss through the combination of the namesake and Venmo platforms. As well, it could focus on building a global digital wallet and less on branded checkout services.
PYPL Stock Might Attract Contrarian Bargain Hunters
At face value, longtime stakeholders of PYPL stock have reasons to be concerned. According to a Payments Dive article, Zelle — the bank-owned P2P payments app — witnessed a 10% increase in transaction volume between last year’s first and second quarters. Adding to the pressure against PYPL stock, the momentum represents a continuation of Zelle’s positive trend in 2022.
Moreover, Amazon’s (NASDAQ:AMZN) decision to stop taking Venmo payments caused heaps of misery on PYPL stock. As PYMNTS pointed out, Venmo’s growth trajectory steadily moved northward in the quarters leading to Amazon’s plug-pulling call.
Still, it’s important to note that PayPal and Venmo combined carry significant brand awareness. According to a Pew Research Center report, a majority of U.S. adults (57%) use PayPal. Further, 38% of Americans use Venmo, while Zelle comes in at 36%. It may take a while to dislodge this dominance.
For contrarian investors, the dark clouds hanging over PYPL stock may be enticing. At the moment, shares trade at only 17.59X trailing-year earnings. While that’s elevated from the 13.5X multiple of the credit services industry, it’s a huge discount from prior prints. For example, in Q2 2020, PYPL traded at a multiple of nearly 80X.
Why It Matters
Even with the Mizuho downgrade, analysts overall still rate PYPL stock as a consensus moderate buy. However, it’s a tight call, breaking down as 14 buys and 16 holds. Moreover, the average price target comes in at $71.08, implying about 22% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
