PayPal Is At A Crossroads, Facing Growing Pains

Bernstein’s Lisa D. Ellis expects Paypal Holdings Inc PYPL to “transition to a payments incumbent, delivering a stable but pressured earnings stream.”

Ellis maintained a Market Perform rating on the company, with a $41 price target.

The analyst mentioned that PayPal was one of the few entrants to have made it to the list of top 15 companies in terms of payments in more than 30 years and now is the leader in the wallet/checkout button, competing with almost every large payments player.

“PayPal took advantage of the secular growth in online purchasing, carved out an innovative master merchant role in the payments ecosystem, and creatively leveraged ACH for attractive economics,” Ellis stated.

On A Crossroads

However, the analyst believes the company has been experiencing “growing pains,” with its economics showing signs of strain as the business scales.

The dependence of ACH is also leading to some tension in the business model, which PayPal is being forced to reconcile with.

On the other hand, competitive threats have also been increasing, and Ellis believes the company is now at a crossroads, needing to decide on whether to “remain a disruptor, become an incumbent, or be disrupted/ rendered obsolete.”

This uncertainty also reflects in the stock, with the valuation only 7 percent above its spin price, 15 months after the spin.

“In the near term, we believe polarized investment views create trading opportunities as the stock swings between the networks and acquirers valuation,” Ellis added.

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