PayPal (NASDAQ: PYPL) hogged the market’s attention for the wrong reasons as James Faucette, an analyst at Morgan Stanley, downgraded the payment processing company’s rating to Equal Weight from Overweight, highlighting postponements in product launches and upgrades. The stock of PayPal, which lost 13.80% last year, ended Tuesday’s trading session at $61.05, down $0.69, or 1.12%, from the prior close.
Specifically, Faucette pointed out setbacks in advancing key strategic initiatives, such as the improvement of Branded Checkout and the expansion of Venmo.
Furthermore, the analyst stated that the main rationale for backing the downward revision of the rating includes delayed progress in achieving accelerated eCommerce growth.
Also, Morgan Stanley expressed doubts about PayPal’s capability to potently capitalize on Venmo as a widely used checkout platform by the younger Gen, considering the sluggish pace of adoption.
Overall, as per James Faucette, there are apprehensions regarding PayPal’s ability to allocate funds without considerable downward adjustments to earnings per share, hampering significant business and tech advancement in the near term.
In his note to clients, the Morgan Stanley analyst believes that PayPal can generally increase its topline in accordance with the broader e-commerce landscape (excluding Amazon). He suggests that enhancements in operational efficiency, coupled with continuing share repurchases, can aid low-teen earnings per share (EPS) growth despite challenges to gross profit margin.
The analyst mentioned that “the initial evaluation was based on the belief that PayPal’s prominent position in online acceptance and industry-leading attrition rates, coupled with endeavors to swiftly alleviate friction in Branded Checkout and expedite the expansion of Venmo acceptance online, would enable the company to acquire and maintain a larger online market share, specifically among younger users. This strategy was expected to sustain uniform growth, surpassing the all-around pace of e-commerce.”
James Faucette concluded by stating that Morgan Stanley’s updated assessment and in-house data monitoring enabled the recognition of sluggish progress in principal strategic initiatives. The intricate steps yet to be completed suggest that advancements will be time-consuming, with narrow profit and loss benefits anticipated over the next 12 months.
The analyst firm believes that competing with Apple Pay will be a time-intensive process with formidable challenges for PayPal.
Based on the aforesaid facts, while downgrading the rating to Equal Weight from Overweight, James Faucette slashed the price target to $66 from $118 issued earlier.
The downgrade is expected to keep the stock of PayPal slightly bearish in the short term.
The historical price chart indicates that the stock of PayPal is facing resistance at $61. The next support is anticipated to be only near $55. Additionally, the stochastic indicator has made a lower-high formation. Therefore, it would be prudent to open a short position after the stock breaks below its 50-day moving average.
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