The Stock of Paypal Continues to Decline as One Bull Jumps Ship

PayPal Holdings Inc. is making significant strides in modernizing its platform, yet it faces considerable challenges that have led Evercore ISI analyst David Togut to adopt a cautious stance on its stock.

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Late Thursday, Togut downgraded PayPal shares (PYPL, -0.65%) from outperform to in-line, following the company's second-quarter earnings report, which showed continued pressure on transaction margins.

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Togut expressed concerns about the sustained negative impact on transaction margins due to the probable rapid growth of low-take-rate and transaction-margin Braintree. Additionally, he highlighted the emergence of increasing credit losses on PayPal's business loan book, raising the possibility of further loan-loss reserves in the coming year.

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Although PayPal shares initially opened higher on Friday, they experienced a decline of 0.8% after a significant 12.3% plunge during Thursday's session. The stock was on track to extend its losing streak for a fourth trading day.

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Togut believes that the company lacks a clear strategy to expand its transaction margins on a year-over-year basis, resulting in limited potential for earnings outperformance, despite accelerated growth in branded PayPal wallet volume during June and July.

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In his latest report, Togut revised his price target for PayPal shares from $85 to $65.

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Furthermore, competition in the market is a concern for Togut. He pointed out that with Apple Pay becoming more prevalent for online checkout and offering 1-click checkout, consumers have more alternative payment methods available compared to PayPal.

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On a positive note, Chief Executive Dan Schulman expressed optimism about PayPal's branded checkout business, expecting it to grow at or above the rate of overall e-commerce growth in the future. However, Togut's overall outlook remains cautious given the current challenges and uncertainties surrounding the company's performance.

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