PayPal: Don’t Keep Hanging On To A Poor Call
Contributor since 2021 / 30952 Followers
Summary:
- PayPal stock’s worst decline may be over, but it still faces stiff resistance at the $66 level, potentially losing upward momentum.
- PayPal faces significant challenges from Apple and other competitors in the branded space and from Stripe and Adyen in the unbranded space.
- PayPal is implementing a strategy to enhance competitiveness, but the company may need to invest more aggressively to rejuvenate growth.
- I explain why PayPal is stuck in a rock and a hard place. It needs to spur growth while dealing with an elevated cost base to improve profitability.
Justin Sullivan
Investors in PayPal Holdings, Inc. (NASDAQ:PYPL) are likely assessing whether the worst in its price decline could be over since my previous update in October (pre-earnings). I argued that while PYPL is expected to “stage a momentary reversal given oversold conditions,” there’s still much for PYPL buyers to prove to untether it from its bearish bias.
Accordingly, PYPL has outperformed the S&P 500 (SPX) (SPY) since my previous update, as dip-buyers attempted to hold its October lows. However, PYPL has faced stiff resistance at the $66 level over the past three weeks, suggesting its buying momentum could lose its upward thrust if profit-taking gains speed.
As a result, I believe it’s timely for holders to reassess whether they should consider reallocating their exposure from PYPL, given the recent recovery, or continue to wait for CEO Alex Chriss to execute a sustained recovery. However, it should be noted that PayPal faces significant competition in its market. In the branded space, it faces Apple’s (AAPL) increasing focus on gaining share in financial services. Notwithstanding the recent setback as it looks to exit its partnership with Goldman Sachs (GS), the Cupertino company has a massive consumer ecosystem through the iOS walled garden. As a result, I believe the headwinds against PayPal are likely to intensify, not moderate.
Also, PayPal faces stiff competition against highly competitive peers in the unbranded space against Stripe (privately held) and Adyen (OTCPK:ADYEY). Stripe reported a 35% YoY revenue growth in Q3, as it returned to profitable growth. With a reported $50B valuation, it is ahead of Adyen’s most recent market cap of $40.2B. The significant recovery (up more than 100% through this week’s highs) in ADYEY since its bottom in early November suggests the market was keen on lifting ADYEY ahead of PYPL. As a result, the market remains focused on growth and profitability, with ADYEY assigned an “A-” growth grade and a “B+” profitability grade. PYPL last traded at a market cap of about $68B, well ahead of its leading unbranded peers. However, I expect the market to be lukewarm on re-rating PYPL further, as Adyen and Stripe seem to have weathered their recent challenges well.
Furthermore, PayPal CEO Alex Chriss has reportedly stepped on the gas to transform its branded strategy with Project Quantum Leap. The initiative is designed to implement “significant changes to enhance the company’s competitive stance.” As a result, it could mark a “strategic shift, focusing on innovation and competitiveness.” The Information highlighted that the project aims for a “comprehensive overhaul aiming to improve PayPal’s digital wallet and online checkout.” As a result, it could indicate a renewed offensive in PayPal’s attempt to defend its market share against the intrusion of Apple and other competitors. However, could that suggest that PayPal might need to invest more aggressively to rejuvenate growth?
Chriss stressed in PayPal’s third-quarter or FQ3 earnings conference that PayPal’s elevated cost base “impacts agility.” As a result, the company needs to remain focused on “improving operating leverage by managing and potentially reducing costs.” Therefore, PayPal is in the process of “improving operational speed and efficiency,” aimed at achieving improved operating leverage as PayPal’s growth slows. In other words, I believe PayPal is likely in a rock and a hard place. It needs to defend against Apple’s growing clout and ambitions in the branded space while trying to gain market share against the highly competitive Adyen and Stripe in the unbranded space.
As a result, I believe that’s what the market has priced in, suggesting PYPL’s best years are likely over. In other words, investors should wake up and not hope that PayPal could return to the pre-COVID high-growth years. While tagging PYPL with a bearish rating at the current levels is likely over-pessimistic, I’m not keen to assign it a bullish rating either.
I exited PYPL at the $57.75 level in mid-October and got involved with other opportunities as I reallocated my funds. I’m glad I did it because the reallocation has allowed me to significantly outperform PYPL from the levels I sold. Accordingly, PYPL closed just +6.3% above the levels I sold more than two and a half months ago. Among those that I reallocated within one month from my sale include Lowe’s (LOW), Blackstone (BX), and ASML (ASML). All three positions have posted solid gains since then. LOW closed +14.7%, BX closed +35.6%, and ASML closed +31.4% (All these trades have “receipts,” as indicated in my service’s trade alerts). All are considered high-quality stocks, like PYPL, with sustainable moats.
| Ticker | Name | Price/Fair Value | Economic Moat |
|---|---|---|---|
| PYPL | PayPal Holdings Inc | 0.45 | Narrow |
| WRDLY | Worldline SA ADR | 0.64 | Narrow |
| GPN | Global Payments Inc | 0.71 | Narrow |
| ADYEY | Adyen NV ADR | 0.81 | Wide |
| STNE | StoneCo Ltd Class A | 0.84 | None |
| FISV | Fiserv Inc | 0.92 | Narrow |
| SQ | Block Inc Class A | 0.93 | Narrow |
| V | Visa Inc Class A | 1.00 | Wide |
| MA | Mastercard Inc Class A | 1.01 | Wide |
| AXP | American Express Co | 1.05 | Wide |
Morningstar valuation and economic moat ratings.
Why stay with a stock that’s still on a medium- and long-term downtrend when much more attractive opportunities present themselves? PYPL seems “dirt-cheap” relative to its peers, as seen above, and likely reached peak pessimism. However, there are much better opportunities available for discerning investors. Capital is competitive and fungible, right? As investors, we must always remain good capital allocators and not hold on to a poor call when it’s time to fold ’em.
Rating: Maintain Hold.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
I Want To Hear From You
Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BX, LOW, ASML either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
A Unique Price Action-based Growth Investing Service
- We believe price action is a leading indicator.
- We called the TSLA top in late 2021.
- We then picked TSLA’s bottom in December 2022.
- We updated members that the NASDAQ had long-term bearish price action signals in November 2021.
- We told members that the S&P 500 likely bottomed in October 2022.
- Members navigated the turning points of the market confidently in our service.
- Members tuned out the noise in the financial media and focused on what really matters: Price Action.
Sign up now for a Risk-Free 14-Day free trial!
