PayPal's stock has been a major laggard. Here's what could get it going.

By Emily Bary

New products aren't factored into forecasts, and the bar looks low, a Bernstein analyst notes

While PayPal Holdings Inc. shares have gained about 6% to start the year, they've lagged the S&P 500's roughly 10% ascent over that period - and they staged meaningful annual declines over each of the past three years as the broader market rallied.

With that backdrop, Wall Street is largely neutral on the stock, as 24 of the 48 analysts carry a hold-equivalent rating. (Two are at sell, while the other 22 are bullish.)

But one of those sidelined analysts, Bernstein's Harshita Rawat, recently examined what could prove her market-perform thesis wrong or, in other words, what could get PayPal shares (PYPL) going again.

To start, sentiment is depressed to the point where the company, under its new management team, likely faces a low bar. Rawat noted that the sell-side consensus calls for a mid-single-digit compound annual growth rate on gross profit for 2024 to 2026, while buy-side expectations are even lower than that. Management, meanwhile, has indicated in recent investor meetings that its outlook is "prudent."

"Pulling back from unprofitable deals (on Braintree) may (on surface) mean that [the] gross-profit outlook can be better," Rawat wrote. And the company has several newer efforts in the works, such as a Fastlane product meant to speed up the process of guest checkout, and these aren't reflected in forecasts. Yet they "can accelerate growth," according to Rawat.

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Wall Street has been worried about the outlook for PayPal's core checkout button given competitive pressures from Apple Inc.'s (AAPL) Apple Pay and others, but Rawat noted the tone from management is that investors have too pessimistic a view of it. There could be enhanced disclosures at a future investor day.

"Better consumer experiences, improved latencies and rewards can possibly slow the bleed on the button," Rawat wrote.

In a bull-case scenario, Rawat sees the potential for PayPal to compound earnings growth at a rate in the teens, while the stock could potentially surpass $100. It now trades near $65.

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Rawat, though, upped her price target only to $66 in her latest note - from $57 before.

"The cash-cow button is likely losing share from a thousand cuts, especially in the most profitable areas of [small- and medium-sized business] & cross-border," she wrote. Meanwhile, "Braintree (even with renewed focus on 'profitable growth') is not really a needle mover."

-Emily Bary

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04-01-24 1718ET

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