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Why PayPal Stock Dropped Today

By Rich Smith – Jan 10, 2022 at 10:37AM

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Paribas thinks investing in PayPal would be a faux pas.

What happened

Shares of online payments behemoth PayPal Holdings (PYPL 0.30%) plunged on Monday and remain down 3.7% as of 3 p.m. ET. And yes, with the Nasdaq Composite down 0.8%, it's true that a lot of tech stocks are in the red today.

But in PayPal's case, there's a clear reason for the sell-off.

Red stock arrow climbing down five sequentially smaller stacks of money.

Image source: Getty Images.

So what

As reports today, French investment bank Exane BNP Paribas just cut its rating on PayPal stock from outperform to neutral, and set a $200 price target on the stock. On the one hand, that may sound like good news to you -- after all, PayPal shares only cost about $180 and change right now, so a $200 price target implies at least some upside in the stock.

On the other hand, though, that upside could be limited if Paribas' predictions come to pass.

As the banker explained in its note, at more than 45 times earnings, PayPal stock already trades at a premium to its fintech peers. But that premium price might not last long if PayPal starts missing earnings -- and indeed, Paribas thinks PayPal will miss earnings over the next couple of years.

Now what

On average, Paribas says its earnings estimates for PayPal in both 2022 and 2023 fall 7% to 8% below consensus targets for the stock. And what that means in dollars and cents is that PayPal could potentially earn as little as $3.29 per share this year.

Such a result would replace analysts' expected 7.5% earnings growth this year with an 8% earnings decline instead, and turn PayPal from a growth stock into whatever the opposite of a growth stock is. Similarly, an 8% earnings miss in 2023 would result in PayPal earning only $4.49 next year, versus analysts' consensus target of $4.88.

Suffice it to say that two straight years of earnings misses is not at all what investors were hoping Paribas would predict for PayPal -- hence the sell-off.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends PayPal Holdings. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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