Digital payments platform PayPal Holdings, Inc. (PYPL) in San Jose, Calif., recently announced a new partnership with Amazon.com, Inc. (AMZN), which will allow Venmo users to use the service as a checkout option on Amazon's platform. The company also announced a $2.7 billion deal to buy Paidy, a ‘buy now, pay later’ solutions provider in Japan. 

However, Bernstein has downgraded the stock from ‘Outperform’ to ‘Market Perform’ and lowered the price target from $260 to $220.

The stock has lost 28.7% in price over the past month and 32.5% over the past three months to close Friday’s trading session at $193.61. In addition, it is currently trading 37.6% below its 52-week high of $310.16, which it hit on July 26, 2021. Furthermore, intensifying competition in the digital payment market poses a severe risk to the company’s market position. So, PYPL’s near-term prospects look uncertain.

Here is what could influence PYPL’s performance in the upcoming months:

Solid Financials

For its fiscal third quarter, ended September 30, 2021, PYPL’s net revenue surged 13% year-over-year to $6.18 billion. The company’s non-GAAP free cash flow for the quarter increased 20% year-over-year to $1.29 billion. In comparison, its non-GAAP net income came in at $1.32 billion, representing a 3% year-over-year increase. Its non-GAAP EPS was  $1.11, up 4% year-over-year.

Ongoing Investigations

Several law firms are investigating potential claims against PYPL and some of its officers on behalf of shareholders who purchased or otherwise acquired PayPal securities between February 9, 2017, and July 28, 2021, on concerns of a potential violation of federal securities laws. It is alleged that the company had deficient disclosure controls and procedures.

Stretched Valuation

In terms of forward P/S, PYPL’s 8.97x is 110.8% higher than the 4.26 x industry average Likewise, its 8.83x forward EV/S is 104.5% higher than the 4.32x industry average. Also, the stock’s forward EV/EBITDA and EV/EBIT of 30.32x and 35.04x, respectively, are higher than the 16.95x and 20.74x industry averages.

 POWR Ratings Don’t Indicate Enough Upside

PYPL has an overall C rating, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PYPL has a D grade for Value, which is in sync with its higher-than-industry valuation ratios. In addition, PYPL has a C grade for Stability, which is consistent with its beta of 1.10.

PYPL also has a D grade for Growth and a C grade for Sentiment. This is justified because analysts expect its EPS to decline 4.1% year-over-year to $1.17 for the quarter ending March 31, 2021.              

Moreover, the stock has a C grade for Quality, consistent with its 0.35% trailing-12-month asset turnover ratio, which is 44.8% lower than the 0.64% industry average.

PYPL is ranked #44 of 53 stocks in the Consumer Financial Services industry. Click here to access all of PYPL’s ratings for Momentum as well.

Bottom Line

PYPL is currently trading below its 50-day and 200-day moving averages of $247.99 and $264.67, respectively, indicating a downtrend. So, the stock looks overvalued at the current price level, and we think it could be wise to wait for a better entry point in the stock.

How Does PayPal (PYPL) Stack Up Against its Peers?

While PYPL has an overall POWR Rating of C, one might want to consider investing in the following Consumer Financial Services stocks with an A (Strong Buy) or B (Buy) rating: Regional Management Corp. (RM), OneMain Holdings, Inc. (OMF), and Atlanticus Holdings Corporation (ATLC).

PYPL shares were trading at $188.08 per share on Monday afternoon, down $5.53 (-2.86%). Year-to-date, PYPL has declined -19.69%, versus a 27.20% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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