Wall Street slashed PayPal’s stock in half, yet ‘uncertainty’ remains as earnings season approaches

PayPal Holdings Inc. is still facing ‘uncertainty’ from Wall Street after losing more than half of its value so far this year.

In the early days of the COVID-19 crisis, PayPal was a financial darling, as the payment-technology business profited from rapid growth in online commerce as well as consumer stimulus programmes that allowed money to be sent directly to digital wallets like PayPal-owned Venmo.

When it last reported earnings in February, though, the business warned of certain expenditure challenges and disclosed a change to its user-growth plan, steps that shook the confidence of Wall Street.

Analysts are wary of PayPal’s next earnings report, owing to a previously reported management transition. PayPal announced earlier this month that Chief Financial Officer John Rainey would leave in late May to take the same position at Walmart Inc., and some analysts noted that the business did not reaffirm its outlook when Rainey’s departure was announced.

“One thing is certain: the lack of a guidance update will create more uncertainty to 1Q than the stock needs at this juncture,” noted Mizuho analyst Dan Dolev, who rates the company as a buy with a $175 price target.

PayPal officials announced in February that the company will change its user acquisition strategy, a decision that made sense to some on Wall Street but was a significant surprise given PayPal’s long-standing concentration on net-new account growth.

PayPal’s original medium-term goal was 750 million active accounts, but Rainey acknowledged on the most recent earnings call that the number was no longer “appropriate.”

PayPal intended to shift its attention away from “incentivized customer-acquisition tactics” geared at jolting “minimally engaged” consumers and toward encouraging more engagement from its more active users.

According to Barclays analyst Ramsey El-Assal, the upcoming report could reveal “tough” dynamics for PayPal’s net-new account additions.

However, he believes the study will serve as a “clearing event” for PayPal: The first quarter was compared to “the toughest prior-year comparable,” and investors will likely have a clearer idea of how the strategic adjustments will appear in user numbers after the upcoming report.

El-Assal has a high rating. PayPal’s stock is rated overweight, with a target price of $200.

Analysts are also looking at other areas of the company’s projections. PayPal cut its revenue forecast for 2022 from a preliminary range provided in late 2021 in its most recent earnings release, but some are concerned that the revised forecast will be tough to meet given macroeconomic trends such as inflation and a strengthening currency.

“PayPal is likely disproportionately impacted from high inflation and its effect on discretionary spending, as PayPal skews toward discretionary e-commerce spend,” noted Harshita Rawat of Bernstein, who rates the company as market perform with a $110 price objective. “The recent dollar strengthening also poses a problem for lucrative international revenue (not just a translation effect).”

Here’s what to look out for in PayPal’s April 27 earnings release.

What can you expect?

Earnings

According to FactSet, the company’s adjusted earnings for the March quarter are expected to be 88 cents per share, down from $1.22 per share a year ago. The average expectation for adjusted earnings is similarly 88 cents per share, according to Estimize, which crowdsources projections from hedge funds, academics, and others.

Revenue

First-quarter revenue is expected to be $6.4 billion, up from $6.0 billion a year ago, according to FactSet. According to Estimize, the average revenue forecast is $6.4 billion.

Stock movement

PayPal’s stock has fallen in three consecutive earnings releases, including a record 24.6 percent plunge in the trading session following the most recent report. The stock has lost 67 percent in the last year, while the S&P 500 has gained roughly 1%.

What analysts have to say

In conjunction with the next report, one significant question is whether PayPal will perform a broad reset of its near-term and medium-term outlooks. According to Wolfe Research analyst Darrin Peller, realigning expectations might help make PayPal’s stock more appealing to longer-term investors who see a great price but are concerned about the possibility of a guideline drop down the road.

“[M]ost would also like to see guidance reset first, before adding materially to positions, with a comprehensive reset of guidance, both near and medium-term, preferred by investors over keeping an overhang on shares (assuming a reset is warranted),” he wrote in a note to clients.

The stock has an outperform rating from Peller, with a $160 price target.

Analyst Andrew Bauch of SMBC Nikko Securities America was sceptical, however, that investors would see this reset with the upcoming report.

“[W]e think the recalibration of medium-term guidance may take longer than some investors appreciate, given this ‘clearing event’ in our view would be better served if crafted by the incoming CFO,” he said, retaining an underperform rating and dropping his price target to $105 from $125.

PayPal’s comments on several of its newer projects, such as efforts to increase revenue from its Venmo service and gain traction with in-store payments, will also be noteworthy.

“[I]n the absence of Venmo and/or in-store monetization, we do not believe PayPal will be able to sustain organic revenue growth faster than the overall e-commerce market i.e. ~15%,” writes Truist Securities analyst Andrew Jeffrey. He has a $115 price objective on PayPal shares and says he is “cautious about PayPal’s ability to monetize Venmo.”

For the latest Business News Follow BOL News on Google News. Read more on Latest Business News on oldsite.bolnews.com