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PayPal Stock Is Down Over 3% on Analyst Downgrade

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The stock of payment company PayPal Holdings (PYPL) was down over 1.5% in premarket trading today. PayPal stock was down over 3% as of 1:40 PM ET. It fell after a Wall Street analyst slashed his rating on the stock. On July 29, Guggenheim’s Jeff Cantwell downgraded PYPL to a “sell” from a “neutral” rating. Cantwell also set a price target of $104 on the stock. The new target reflects a potential downside of 9.9% from the company’s closing price of $115.49 on July 26.

According to a CNBC report, Cantwell expects numerous headwinds ahead for the stock in 2020. These headwinds, including the eBay separation, Brexit, and regulatory changes in Europe, could hinder PayPal’s growth. The analyst foresees a revenue slowdown next year. Further, the departure of the company’s key executives is also pressuring its stock. In mid-February, Guggenheim downgraded PayPal’s rating from a “buy” to a “neutral.”

Headwinds for PayPal

According to Guggenheim, the company could face weakness in revenue growth going forward. Last week, during its second-quarter results, PayPal lagged revenue estimates and slashed its revenue forecast for the full year. PayPal’s revenue of $4.31 billion rose 12% YoY (year-over-year) in the second quarter, but it lagged analysts’ expectation of $4.33 billion. The company’s revenue growth rate has been slowing YoY since the first quarter of 2018.

PayPal reduced its revenue guidance for the full year. The California-based company now expects revenue in the range of $17.6 billion–$17.8 billion for 2019. This guidance implies a growth rate of 14%–15% in 2019, down from the company’s earlier growth rate guidance of 16%–17%. PayPal blamed a delay in product integration and currency for its lowered revenue guidance. The delay in its pricing initiatives could further weigh on its revenue.

PayPal’s valuation

PayPal’s 2019 sales are expected to fall YoY. The company’s revenue is also expected to rise 15.1% in 2019, down from 18% in 2018. Its sales are expected to grow 18.1% in 2020.

PayPal stock currently trades at 37.1x its 2019 estimated EPS of $3.11 and 32.9x its 2020 estimated EPS of $3.51, which is based on projected growth rates of around 28.5% and 13%, respectively, in those periods.

Analysts’ recommendations

Of the 42 analysts tracking PayPal, 32 have rated the stock as a “buy,” while nine have rated it as a “hold.” Only one analyst has recommended a “sell” on the stock. Analysts’ average target price for PYPL is $125.37, which indicates that the stock has a potential upside of 8.6% from its current level.

Despite the slowdown in its revenue growth, PayPal stock is up nearly 37.3% since the beginning of the year, which has made it attractive on the valuation front. In comparison, the S&P 500 was down 0.21% year-to-date on July 26.

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