Please ensure Javascript is enabled for purposes of website accessibility

Why PayPal Stock Slumped Today

By Rich Smith – Nov 17, 2021 at 2:38PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

PayPal isn't dead yet, but it's certainly suffering a thousand cuts.

What happened

Shares of e-payments specialist PayPal Holdings (PYPL 4.88%) fell 5.2% in 2:10 p.m. EST trading Wednesday afternoon.

You can blame Bernstein for that.

Red down arrow on a black backdrop of tickertape prices.

Image source: Getty Images.

So what

In a note out this morning, investment banker Bernstein cut its rating on PayPal stock from outperform (i.e., buy) to market perform (i.e., don't buy), and cut its price target on the stock more than 15% to $220 per share.

As reported, Bernstein is worried PayPal's business is at risk of being "disrupted" from two separate directions. On the one hand, the banker sees Big "eComm" companies like Amazon and Shopify getting even bigger, and gaining more clout in terms of being able to negotiate favorable rates with payment services like PayPal.

On the other hand, the analyst sees PayPal suffering a potential death "from a thousand cuts" as rival payments companies nibble away at its business. Buy now, pay later, Apple Pay, and Shop pay are all threats to PayPal's dominance, warns Bernstein. So, too, is the situation in which shoppers place their credit card information "on file" with an e-commerce company, such that paying with a card becomes shoppers' default way to shop -- so they don't even consider whether they might rather pay with PayPal.

Now what

Valued in excess of a quarter-trillion dollars, costing 50 times earnings and almost 50 times free cash flow, PayPal is priced like a fast-growing growth stock, but actually grew its sales only 13% last quarter -- and grew its earnings less than half as fast.

Make no mistake, despite all the criticism, PayPal remains an incredibly profitable and free-cash-flow-positive business. But when it comes to PayPal stock, Bernstein is right to worry that there's a disconnect between the stock's valuation and how slowly it's been growing lately.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Apple, PayPal Holdings, and Shopify. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2022 $75 calls on PayPal Holdings, long January 2023 $1,140 calls on Shopify, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, short January 2023 $1,160 calls on Shopify, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.