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Burden of proof rests on PayPal, says analyst

PayPal's earnings are planned for Thursday.

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Wall Street is taking another shot at PayPal stock. This time it’s Raymond James analyst John Davis, who downgraded PYPL shares to "market perform" from "outperform" with a cautious stance. PayPal’s stock initially tumbled close to 4 per cent in response to the downgrade but rebounded by the end of the session on Tuesday to close 1 per cent higher. 

The analyst’s worries are two-pronged. First, a roughly 20 per cent run in PayPal’s stock year-to-date, compared to the S&P 500’s 8 per cent gains. And second, the company’s Q4 results set for later this week. Davis is bracing for a disappointing 2023 revenue outlook, blaming flat-to-negative growth for branded checkout.

He expects PayPal’s 2023 revenue growth outlook to be in the 6-7 per cent range, below Wall Street estimates of up close to 9 per cent. He is not alone. Harshita Rawat of Bernstein reportedly believes PayPal will “modestly” fall short of 2023 revenue expectations.

Davis' outlook is not all bad. He expects PayPal to beat Q4 expectations on both the top and bottom lines amid a weaker USD and opex that remains in check. However, investors will likely be focused on the 2023 revenue picture, and here’s where the analyst expects PayPal will disappoint.

As a result, it could be deja vu all over again for PayPal. The company has been feeling the heat from competitors, particularly Apple Pay, which has been taking market share and wreaking havoc on PYPL shares.

“[We] believe the burden of proof has shifted to PYPL and fear the 2023 revenue outlook won’t help,” Davis said in a note obtained by AltFi.

PayPal still has a bigger piece of the global e-commerce pie vs. Apple, at 16 per cent compared to 5 per cent, respectively, as per Deutsche Bank. Analysts at the firm suggest investors will be able to tell if PayPal is losing market share by paying attention to its payments volume tied to merchants. 

PayPal’s cost cuts of an estimated $170m from the recently announced layoffs should help to offset any weakness the company experiences in its top line this year. This should ultimately trickle down to earnings growth, too. However, it might be too little too late for what Davis expects will be a “share loss narrative” that is only going to get louder for PYPL.  

One potential catalyst that could buoy PayPal stock is its $15bn share buyback announced last year, with an estimated $4bn completed in 2022. PayPal reports earnings on Thursday.

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