PayPal cut to Market Perform at MoffettNathanson on lackluster gross profit view
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PayPal Holdings (NASDAQ:PYPL) stock dipped 1.3% in Monday premarket trading after MoffettNathanson downgraded the fintech to Market Perform from Outperform as incoming CEO Alex Chriss faces a number of headwinds, including formidable competition from Apple Pay (AAPL) and Block's (SQ) Cash App and limited opportunities for further cost cuts.
The payment tech company's stock has suffered in the past 18 months as PayPal's (PYPL) gross profit dollar growth abruptly slowed to about flat in 2022 and 1% year-to-date in 2023, down from 17% in 2021 and 22% growth in 2020, said analyst Lisa Ellis in a note to clients.
The underlying drivers for that slowdown include "fierce competitive pressure" in its branded checkout sector from Apple Pay and an aggressive pricing strategy at its Braintree unit to win market share among large enterprise ecommerce customers. Also, Venmo's volume growth has flattened, likely due to competition from Block's (SQ) Cash App.
The Braintree strategy aims to cross-sell customers to higher-margin products, but that dynamic has yet to pay off. "We are not seeing evidence that the cross-selling is working, and, in the meantime, Braintree risks triggering a price war in a highly consolidated, competitive, and commoditizing U.S. LE ecomm market," Ellis said.
She expects PayPal's (PYPL) gross profit growth to remain in the low- to mid-single digits, "and we see the potential for further downside to our estimates, particularly given the strong momentum of Apple Pay, which we worry will begin to benefit from the powerful network effects in payments."
The Market Perform rating aligns with the SA Quant rating of Hold and disagrees with the average SA Analyst rating and Wall Street rating, both at Buy.

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