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Elevator Pitch
I maintain a Buy investment rating for PayPal Holdings’ (NASDAQ:PYPL) shares.
I reviewed PayPal’s Q2 2022 financial performance and assessed PYPL’s share price recovery potential with my earlier August 12, 2022 update for the company. In this latest write-up, my focus is on PayPal’s outlook in the coming year.
I continue to assign a Buy rating to PayPal, as I see PYPL’s shares outperforming in 2023. Investors should watch out for the potential of PYPL reporting above-expectations earnings, and the realization of other key catalysts such as market share gains.
What Do Analysts Believe About PayPal?
The analysts believe that PayPal isn’t as attractive an investment candidate as it was a year ago, and their beliefs about PYPL are incorporated into the stock’s investment ratings and price targets.
PYPL’s consensus sell-side analyst rating has declined from 4.36 (with 1 equivalent to a Strong Sell, and 5 representing a Strong Buy) as of the end of the prior year to 4.11 now.
In the same time frame, the median analyst target price for PayPal was cut by -62% from $273.50 to $104.50 based on S&P Capital IQ data.
In the next section, I touch on potential catalysts which could possibly change Wall Street’s perception of PayPal in a positive way.
What Are PayPal Catalysts To Watch For?
I am of the view that PayPal has two key catalysts worth watching out for in 2023.
PYPL’s first catalyst is stronger-than-expected market share gains.
Deutsche Bank (DB) issued a research report (not publicly available) titled “Is PYPL Losing Market Share?” on November 16, 2022, which highlighted that investor “attention has turned to the question of whether PYPL’s core business is maintaining or losing market share.” It is reasonable to assume that this is one of the key investor concerns for PayPal that led to sell-side analysts lowering their respective target prices and investment ratings for the stock.
At UBS’ (UBS) 50th Annual Global TMT Conference on December 7, 2022, PayPal addressed the issue of market share by revealing that the company “held or slightly grew (market) share” in 2022 year-to-date based on its TPV (Total Payment Volume) data and industry research. If PayPal is able to prove to the market that it is able to maintain and gain market share going forward, this will definitely help to push its stock price up.
The second catalyst for PayPal is a faster-than-expected increase in the adoption rate of BNPL (Buy Now, Pay Later).
PYPL holds the leading position in BNPL, a growing segment of the payments market. An analyst from UBS quoted a consumer survey done by the bank at the recent December 7, 2022 UBS TMT Conference which noted that “36% of Buy Now, Pay Later users chose PayPal’s Pay In Four as the most often used BNPL product.” Therefore, if the penetration rate of BNPL grows at a faster pace, this will be a tailwind for PYPL.
I touch on the key metrics that support the realization of these two key catalysts for PayPal in the subsequent section.
PYPL Stock Key Metrics
An analysis of certain key metrics suggest that there is a high probability of the two catalysts (highlighted in the preceding section) materializing in time to come.
On December 8, 2022 Barclays (BCS) published a report (not publicly available) titled “Is PYPL Losing Share? Our Data Suggests: Not as Much as You’d Think.” In this report, Barclays mentioned that “PayPal has double the online acceptance of Apple Pay” according to Digital Commerce 360 data. BCS also noted in its report that its own credit card (Barclaycard) data showed that “PYPL’s share of overall Barclays e-commerce volumes and transactions has consistently increased.”
Data sourced from this Barclays report is consistent with PYPL management’s comments regarding its market share gains in this year thus far at the recent UBS conference. As such, concerns regarding PayPal’s potential market share loss might be overblown.
Separately, PayPal disclosed at UBS’ 50th Annual Global TMT Conference in early December that more than a million people utilized its BNPL product on this year’s Black Friday, while its BNPL volume surged by +110% YoY during the recent Cyber 5 weekend. Although PYPL’s BNPL business has done reasonably well, industry data suggests that the growth runway for BNPL is still very long.
A November 16, 2022 research report (not publicly available) published by JPMorgan (JPM) titled “BNPL JPM Survey And Takeaways – Oct’ 22” highlighted that a survey of “2,110 adults in the U.S.” found that a mere “35% of those surveyed used BNPL within the past six months.” In the JPM report, it is also disclosed that “BNPL was the preferred payment method for only a low single-digit percentage of responders” with “Gen Z/Millennial and slightly more affluent” being the key BNPL users. In other words, there is lots of room for BNPL to grow, given that BNPL isn’t as commonly used as what one would expect, and BNPL has yet to gain favor with older adults and other consumer segments.
What Is The Forecast For 2023?
The market’s consensus 2023 financial forecasts might be a tad too conservative.
Gabrielle Rabinovitch, PYPL’s acting CFO, met with some of BofA Securities’ (BAC) institutional clients on December 9, 2022, according to the broker’s December 12, 2022 research report (not publicly available). The company’s CFO shared with investors that PayPal “remains very confident in achieving non-GAAP operating margin expansion of 100+bps and at least 15% EPS growth” for 2023 even in the scenario that “the e-commerce industry declines next year.”
As per S&P Capital IQ’s consensus data, the sell-side sees PayPal expanding its EBIT margin by +1.0 percentage points from 21.0% for fiscal 2022 to 22.0% in fiscal 2023, and the analysts expect PYPL’s normalized earnings per share to increase by +17.6% from $4.06 in FY 2022 to $4.77 for FY 2023.
As such, there is a good chance of PayPal meeting or even beating analysts’ expectations next year based on a comparison of management’s expectations and consensus numbers.
Is PYPL Stock A Buy, Sell, or Hold?
PYPL stock remains as a Buy in my opinion. Expectations for PayPal aren’t high, and this leaves room for the company to surprise on the upside with its 2023 results.
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