Why PayPal Stock Was Down Earlier Today - Nasdaq

What happened

Shares of PayPal Holdings (NASDAQ: PYPL) were down 2.1% as of 11:31 a.m. ET on Tuesday after one analyst downgraded the stock on concerns of rising costs and lower profits.

Susquehanna analyst James Friedman sees PayPal's shifting mix in payment volume toward the Braintree merchant solutions business, which generates a lower profit margin for PayPal, as a headwind for the company. This led Friedman to lower his rating on the stock from positive to neutral.

So what

PayPal's slowing growth coming out of the pandemic has contributed to a 69% decline in the stock price over the last year. While management says it is investing in areas like merchant checkout to gain market share and position the business for long-term growth, Wall Street is more concerned about the hit to earnings per share.

In the second quarter, transaction revenue grew 8% year over year, which management credited to growth in Braintree and Venmo. But Braintree's higher costs have pressured PayPal's adjusted operating margin, which has fallen from 28% to 19% over the last two years.

Slowing top-line growth and falling margins are the reasons the stock has underperformed in 2022, but investors shouldn't look at this stretch as permanent.

PYPL Revenue (TTM) data by YCharts

Now what

PayPal expects adjusted earnings per share to land between $3.87 to $3.97 this year, down from $4.60 in fiscal 2021.

Over the long term, it does not matter how much earnings, or profit, PayPal generates in 2022 but how much it produces over the next 10 years and beyond. Wall Street is generally more focused on short-term performance, so it's understandable why the stock is out of favor.

More importantly, long-term investors should be encouraged that management sees its investments in Braintree as widening its competitive advantage. By the end of next year, management expects operating margin to begin increasing again. If management delivers, that could go a long way to boost what could be an undervalued stock.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends PayPal Holdings. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.