PayPal Has A Lot Of Positives, An Attractive Stock Price Isn't One Of Them

Despite the positives, Stifel downgraded shares of Paypal Holdings Inc PYPL to a Hold, citing valuation. The firm noted shares have reached its price target of $51.

Stock Outperforms

Analysts Scott Devitt, John Davis, Lamont Williams and Logan Thomas noted PayPal shares have climbed 15 percent since the release of the first-quarter results compared to a more modest 1 percent gain for the S&P 500. The upside, according to the analysts, was due to the strengthening of the evidence of positive outcomes on current debates.

Source: Y Charts

The analysts also noted the year-to-date, PayPal was up 29 percent compared to S&P 500's 7 percent.

Well Positioned For Long-Term Growth

Stifel continues to believe that the company is well positioned for long-term growth in the digital payment space, as the management executes in driving deeper relationships with merchants and consumers across multiple verticals.

The firm expects TPV to benefit from continued e-commerce growth as well as secular trends such as mobile adoption and digitization of cash.

"Continued mix shift toward P2P (Venmo), Braintree and larger merchants continues to pressure take rates, though Venmo monetization and more dynamic pricing could lead to upside to forward estimates," the firm added.

The firm expects Pay with Venmo to be rolled out to the U.S. merchant base this year, although believing that the 2017 guidance reflects minimal contribution. The firm feels Pay with Venmo is an attractive long-term opportunity.

Summing up, the firm said One Touch adoption, Venmo and strategic partnerships would benefit customer growth and engagement.

Asset-Light Strategy To Be Positive Catalyst

Stifel believes the asset-light approach to credit may be a positive catalyst, although it is unsure of the potential for sustained multiple expansion. The firm estimates a 6 percent earnings per share headwind from a 51–49-percent joint venture, stemming from the loss of credit earnings, which could be fully offset if the company chooses to use about $3.8 billion for stock repurchases.

As such, the firm downgraded shares of PayPal to Hold, while it maintained its price target at $51, with the firm viewing that the shares currently reflect a balanced opportunity.

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