Despite PayPal’s warning – why do analysts still believe it?

While the payment company PayPal

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Delivering better-than-expected first-quarter reports on Monday, Wall Street focused on its warning that its operating margin would grow 1% this year, down from previous forecasts for 1.25% growth.

PayPal shares plunged 12% in Tuesday’s trading, putting the stock on its steepest decline since February 2, 2022, when it plunged 25%. And with shares trading around $67 a share, PayPal stock is at its lowest close since 2017. The weaker margin growth forecast comes as PayPal expects Braintree, its unbranded payment processing business, to drive further growth for the company. While growth is typically rewarded by Wall Street, Braintree is a lower-margin business than PayPal’s branded business — the latter of which is better known to customers as PayPal’s checkout button. In the first quarter, Braintree saw a 30% increase in volume year-over-year, while the brand saw a 6.5% increase in the same period.

The relative weakness in PayPal’s branded business comes as payments companies face increasing competition. In March, Apple

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Launched Buy Now, Pay Later, entering a crowded space that includes PayPal, Affirm, AfterPay and Klarna. Apple’s offering is tied to its digital wallet app, which can create a more seamless payment process for shoppers than other payment options.

While traders on Tuesday took a more bearish stance on PayPal’s results, analysts were more optimistic. Nearly 75% of analysts rate PayPal stock a “buy” with an average target price of $97.51, implying a potential upside of about 45% from Tuesday’s price.

As some analysts see it, PayPal can use its unbranded offerings as a foundation to expand its branded businesses. “For example, PayPal can use unbranded processes to bring the most advanced integrations of purchases to businesses, which early observations have shown that PayPal’s share of the branded checkout stabilizes or increases in these cases,” said James Fawcett, an analyst at Morgan Stanley. He rates the company’s stock overweight with a target price of $133.

Others on Wall Street are still optimistic about PayPal, but have tempered their expectations. Analysts at UBS Securities consider PayPal shares “undervalued,” given that they expect the company to deliver 20% earnings per share growth this year and next. “Despite creating a negative mix change, PayPal’s unbranded volume reflects upside for the stock, and we would view any potential stock weakness as an attractive buying opportunity,” UBS analyst Raina Kumar wrote. Still, while maintaining a “buy” rating on the stock, UBS lowered its price target to $118 from $129, given the tighter margin outlook.