By Emily Bary
Shares of PayPal Holdings Inc. are off 1.4% in Wednesday morning trading after Jefferies analyst Trevor Williams cut his rating on the stock to hold from buy, warning that the company faces a “muted” setup for the year ahead.
“The poor optics of downgrading ~40% off the highs are not lost on us,” Williams conceded in his note to clients, but he nonetheless made the move because he thinks that PayPal /zigman2/quotes/208054269/composite PYPL -3.22% could have trouble expanding its multiple given concerns on Wall Street about the achievability of its multiyear targets.
At an investor day last February, PayPal’s management laid out goals for 750 million active accounts and $50 billion in annual revenue by 2025 , but Williams said that “confidence has eroded” in these targets after PayPal delivered “soft” fourth-quarter results and a disappointing fourth-quarter outlook.
Williams expects that PayPal’s revenue growth will remain under 20% through the first half of 2022. Given his predictions for more “subdued” growth, he “[struggles] to see a positive catalyst in the near-term that can restore credibility to the medium-term targets.”
“To be clear, we do not believe anything is ‘broken’ in the business (evidenced by the strong top-line growth ex-EBAY) nor do we believe competitive pressure from the likes of Shop Pay have begun to pressure wallet share or pricing yet,” Williams wrote, but he sees “limited potential for multiple expansion.”
He also sees signs that the e-commerce world has been cooling off as more people return to in-person shopping. E-commerce spending represented 19.1% of “‘addressable’ retail sales” in the fourth quarter, he said, below the peak of 22% seen in the second quarter of 2020.
As shopping habits evolve, Williams is watching for indications about average transaction sizes. He said that the relationship between PayPal’s average transaction sizes and those at Visa Inc. /zigman2/quotes/203660239/composite V -1.97% and Mastercard Inc. /zigman2/quotes/207581792/composite MA -0.87% historically have been closely related: All saw a decline in the third quarter from their second-quarter peak. Further, Visa’s November update suggested to Williams that the calendar-fourth quarter could bring an additional decline.
For PayPal, a decline in average-transaction value would mean that the company needs to boost the number of transactions that users make in order to hit consensus estimates for total payment volume, he continued.
Shares of PayPal have declined 26% over the past three months as the S&P 500 /zigman2/quotes/210599714/realtime SPX -4.04% has risen about 9%.