PayPal Holdings, Inc. (PYPL) has been at the forefront of the digital payment revolution for almost 20 years. The San Jose, Calif., company’s payment solutions include PayPal, PayPal Credit, Braintree, Venmo, Xoom, Hyperwallet, and iZettle. PYPL’s stock has gained 11.2% in price over the past year due to the company’s expertise, resources, and strategic collaborations to expand its global footprint.

However, the company’s shares have lost 25.4% in price over the past three months and 21.3% over the past month to close yesterday’s trading session at $204.64. In addition, the stock tumbled 10% on Tuesday after the company reported an uncertain outlook for the next year, which missed analysts’ estimates. Furthermore, eBay Inc.’s (EBAY) shift to its new managed payment system is also dragging on PYPL’s performance. PYPL’s eBay marketplaces’ volume fell 45% in the third quarter.

Though the recently announced deal between PYPL’s Venmo unit and Amazon.com Inc. (AMZN) could improve investors’ sentiment  regarding the stock, the company’s tepid growth outlook for the next year is concerning.

Here is what could influence PYPL’s performance in the upcoming months:

Ongoing Lawsuit

In September, Kuznicki Law PLLC began  investigating PYPL on behalf of its investors. PYPL faces allegations that it made false and misleading statements and failed to disclose that it had deficient disclosure controls and procedures. The complaint alleges that PYPL’s business practices concerning PYPL Credit remained non-compliant with applicable laws and regulations, and the company’s practices regarding payment of interchange rates related to its debit cards were also non-compliant with applicable laws and regulations. This action could have a significant impact on the company’s price performance in the near term.

Strategic Acquisitions

In September, PYPL agreed to acquire Paidy, a prominent two-sided payments platform and provider of buy now, pay later solutions in Japan, for ¥300 billion ($2.7 billion), primarily in cash. With this acquisition, PYPL intends to expand its capabilities and distribution in the domestic payments market in Japan, the world’s third-largest e-commerce market, complementing its current cross-border e-commerce business in the country.

Strong Profitability

PYPL’s 20.1% trailing-12-months net income margin is 220.7% higher than the 6.3% industry average. Also, its 9.3%, 6.6%, and 17.6% respective ROC, ROA, and EBIT margins are higher than their industry averages. Furthermore, its $5.92 billion trailing-12-months cash from operations is significantly higher than the $111.59 billion industry average.

Stretched Valuation

In terms of forward non-GAAP P/E, the stock is currently trading at 44.51x, which is 77.7% higher than the 25.05x  industry average. Also, its 10.48 forward EV/Sales multiple is 140.7% higher than the 4.35 industry average. Furthermore, PYPL’s 9.57x forward Price/Sales is 120.4% higher than the 4.96x industry average of.

POWR Ratings Reflect Uncertainty

PYPL has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PYPL has a D grade for Value. The company’s higher-than-industry valuation justifies the Value grade.

The company also has a C for Stability which is consistent with the stock’s 1.10 beta.

Of the 52 stocks in the C-rated Consumer Financial Services industry, PYPL is ranked #40.

Beyond what I have stated above, one  can view PYPL ratings for Growth, Quality, Momentum, and Sentiment here.

Bottom Line

PYPL’s stock  suffered a sell-off on Tuesday after the company failed to meet the market’s expectations for the next year’s revenue outlook. Although PYPL is projected to benefit from its recently announced deal with AMZN in the coming months, ongoing lawsuits against the company, its lofty valuation, and the end of its contract with eBay could weigh heavily  on its price performance in the coming weeks. So, we believe investors should wait for its prospects to stabilize before investing in the stock.

How Does PayPal Holdings (PYPL) Stack Up Against its Peers?

While PYPL has an overall C rating, one might want to consider its industry peer, Regional Management Corp. (RM), and OneMain Holdings Inc. (OMF), having an overall A (Strong Buy) rating.

PYPL shares were trading at $205.72 per share on Thursday morning, up $1.08 (+0.53%). Year-to-date, PYPL has declined -12.16%, versus a 25.57% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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