Morgan Stanley analysts downgraded PayPal (NASDAQ:PYPL) stock's rating, citing delays in product evolution and progress on strategic imperatives, including enhancing Branded Checkout and expanding Venmo.
Shares fell 1.9% in early Tuesday trade.
The key reasons supporting the downgrade move include slow progress on “faster-than-eCommerce growth.” Moreover, there is skepticism about PayPal's ability to effectively monetize Venmo as a popular checkout tool for young Gen Z/Y shoppers, given the slow progress in acceptance.
Finally, doubts exist regarding PayPal's capacity to make necessary investments without significant downward revisions to earnings per share, hindering meaningful business and technological improvements in the short term.
“However, we still believe PayPal can grow revenues generally in-line with the rate of overall ecommerce (exAmazon), and improvements in operational efficiency along with ongoing share repurchases can support low-teens EPS growth despite pressure on gross profit margin,” the analysts said in a note.
Hence, Morgan Stanley downgraded PayPal to Equal Weight from Overweight with a target price nearly halved to $66 per share.
“Our previous OW thesis was predicated on the view that PayPal's online acceptance lead and industry-low attrition, combined with efforts to quickly reduce Branded Checkout friction and rapidly expand Venmo acceptance online, would help the company gain and retain better share online (especially with younger users), supporting consistent growth above the overall rate of ecommerce.”
“Based on our updated analysis and proprietary data tracking, we find that progress on key strategic imperatives has been slow, and the complexity of what needs to be done suggests progress will remain slow with limited P&L benefits in our recommendation horizon of 12 months,” the analysts concluded.