TD Cowen analyst Bryan Bergin sees “catalysts aplenty” for PayPal Holdings Inc. — but he also sees the stock as a “show-me” story, at least in the near term.
Bergin initiated coverage of PayPal shares
with a market-perform rating and $66 target price late Thursday, writing that while the company has shown some signs of recovery and has compelling capital-allocation potential, he still wants more clarity on PayPal’s various uncertainties.
Among the unknowns? The company recently saw a new chief executive take over and potentially will bring on a new chief financial officer, plus the pace of its branded-checkout recovery is uncertain, as is the durability of discretionary e-commerce spending in this macroeconomic climate.
“[S]hares are materially pressured as macro & competitive uncertainties are
amplified,” Bergin wrote. “Well off post-pandemic highs, [PayPal] faces rising concerns of consumer weakening & macro volatility, competitive threats to its core with perceived e-comm share loss to competing checkout solutions, adverse profitability effect of mix shift (unbranded vs. branded), and a maturing financial profile.”
In Bergin’s view, PayPal has “corrected course” with its branded checkout offering over the past year, but the crucial piece now will be “ramping globally & driving usage while convincing Street its best days are not behind it.”
On the positive front, Bergin noted that PayPal’s “strong financial position” gives it ample room to deliver for investors when it comes to capital-allocation. “We expect
[free-cash-flow] conversion to improve exiting 2023, offering an even greater opportunity for an aggressive [share-repurchase] program,” while the company could also establish a dividend, “serving as a potential catalyst for shares.”
“Shares appear de-risked given stock price performance, yielding a deeply discounted valuation and estimates that reflect a more mature financial profile,” and Bergin understands why some on Wall Street now see upside potential. Still, he’s nervous about the impact of PayPal’s unbranded Braintree business on margins, and he wants to see more proof that the higher-margin branded business is turning around.
He was more upbeat about shares of Square parent Block Inc.
beginning coverage of that name with an outperform rating and $59 price target.
The company “boasts a fundamentally differentiated ecosystem in Fintech and the ability to grow & integrate its solutions makes it among the most likely to challenge industry norms,” he wrote.