PayPal Holdings Inc. is preparing for a new chapter with incoming CEO, Alex Chriss. However, according to analyst Lisa Ellis, the company may struggle to shake off the difficulties it has faced in the recent past.
Ellis, an analyst at SVB MoffettNathanson, downgraded her rating on PayPal shares to market perform from outperform. She expressed concerns about the company’s “lackluster” gross-profit growth under Chriss, who is scheduled to take over the CEO role on September 27.
While Ellis is hopeful for a fresh start at PayPal under Chriss, she anticipates challenges for the company in the coming year. As a result, she lowered her target price on the stock to $75 from $85.
One of Ellis’ main worries is that PayPal’s market share for its high-margin branded checkout business is diminishing. She specifically points out Apple Inc.’s Apple Pay as a significant competitor, making rapid advances in this space.
Ellis considers this competition from Apple Pay as the biggest threat to PayPal and emphasizes that it will be the most critical issue for the new CEO to tackle.
Currently, PayPal has been gaining volume share with its unbranded Braintree business. However, this growth has come at the expense of margins.
Looking ahead, Ellis expects the contribution of unbranded checkout to PayPal’s gross-profit growth to be limited. She highlights that in the highly competitive U.S. Large Enterprise merchant acquiring market, PayPal will need to keep pricing low to retain volume share. Any increase in prices may result in a loss of volume share.
In conclusion, PayPal faces challenges ahead, especially with the rising competition from Apple Pay. It remains to be seen how Alex Chriss will address these obstacles as he assumes leadership at the company.
The Concerns and Challenges for PayPal
PayPal, a global leader in digital payments, has been facing some challenges recently. According to industry analyst Ellis, there are a few areas of concern that need attention. One of these is the Venmo peer-to-peer platform, which has experienced flattened volume growth. This can be attributed to increasing competition from Block’s Cash App and the narrative surrounding Venmo’s monetization potential. Previously seen as a possible source of upside for the company’s stock, Ellis no longer believes Venmo will have a significant impact.
Although PayPal has successfully reduced costs within its business over the past year, Ellis worries about the future as the company reaches the end of its cost-cutting efforts. While operating leverage is expected to continue, it may not yield the same level of earnings-per-share benefit as seen over the past 12 months.
The recent appointment of Alex Chriss as CEO has left Wall Street cautiously optimistic. However, a key challenge for Chriss will be filling various executive vacancies within PayPal. Attracting top talent will be crucial for the company’s success under Chriss’ leadership.
Additionally, PayPal faces investor fatigue due to its elevated level of stock-based compensation, which has exceeded $40,000 per person for four consecutive years. Overcoming this fatigue will be another task for Chriss and his team.
As a result of these concerns and challenges, shares of PayPal have experienced a 2% decline in morning trading on Monday. So far this year, the stock has lost around 12%, while the S&P 500 has seen a 16% increase.
