Payment processing specialist PayPal (NASDAQ:PYPL) is a formerly favored company on Wall Street that’s now in a state of decline. PYPL stock gets a “D” grade because, even if some of PayPal’s financial metrics seem adequate, there are definitely cracks in the foundation.
Not long ago, UBS analysts cut their price target on PayPal shares from $118 to $107, while Jefferies analysts reduced their price target on the shares from $75 to $70.
Clearly, the prevailing sentiment on Wall Street has turned against PayPal. So, let’s dig into the details and find out why PayPal is having problems.
PYPL Stock Brings More Pain to Investors
Surely, it’s part of a chief executive’s job to promote his or her company. Yet, with PayPal, the management’s confidence shouldn’t be enough to convince discerning investors to buy PYPL stock.
President and CEO Dan Schulman has “high confidence” that PayPal’s “business is on the right path.” Schulman is “confident” that PayPal is “well positioned to continue to grow” its “leadership in digital payments.”
Fine, we get the message. PayPal’s chief executive is extremely confident. However, cautious investors should believe the hard data before they believe what a company’s management has to say.
And, the hard data says that PayPal’s second-quarter 2023 GAAP-measured revenue grew 7% year over year. That’s not terrible, but it’s also not mind-blowing.
PayPal reported second-quarter cash flow from operations of -$0.2 billion and free cash flow of -$0.4 billion. These aren’t exactly what we would call confidence-building statistics.
PayPal’s Biggest Problem in 2023
PayPal’s long-term shareholders probably don’t feel very confident now that PYPL stock has collapsed from $300 to the $60s. This is a sign that PayPal may be in trouble, and if you’re still not convinced of this, look at the company’s margins.
Specifically, we should focus on PayPal’s operating margin, which declined from 22.7% in the prior quarter to 21.4% in Q2 2023. Schulman tried to exude confidence.
“We tightened on originations and we’re seeing the effects of that in the quarter. We put a provision in for our losses and I expect that to be a temporary blip across results,” Schulman said.
A comment from Gabrielle Rabinovitch, PayPal’s acting chief financial officer (CFO), didn’t exactly have a “temporary blip” vibe to it, though. “When we think about the back half, in Q3, we’ll still see some pressure on transaction margin performance,” Rabinovitch warned.
PYPL Stock: Watch and Wait for Improvement
The point is, PYPL stock isn’t necessarily a good bargain even if it’s trading at an evidently low price now.
Going forward, investors should heed Evercore ISI analyst David Togut’s cautionary tone. Togut cited declining margins as well as intensifying competition as factors that create “increasing headwinds to revenue and earnings growth” for PayPal.
Don’t get the wrong idea. PayPal isn’t on the verge of bankruptcy or anything like that. The company might improve its margins in the coming quarters.
Unless/until that happens, however, investors should just watch and wait. For now, PYPL stock gets a “D” rating, so don’t be too eager to put it in your portfolio.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.