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PayPal Holdings Inc.’s shares had already slid some 80% from their peak closing high when Adyen NV delivered a grim signal for the payments industry last week, but one analyst thinks Adyen’s discussion of a more commoditized payments landscape could actually be good news for PayPal’s stock.
Dutch payment processor Adyen
ADYEY,
ADYEN,
on Thursday delivered an earnings report that Truist Securities analyst Andrew Jeffrey said revealed a “difficult truth” for the broader payments landscape, that “there is little or no tech differentiation among e-commerce providers, and intensifying competition is creating problems for even the best digital tech stacks.”
Could that discussion actually offer some relief for PayPal’s beaten-down shares
PYPL,
? With “a bit of twisted logic,” perhaps it is a bullish signal, according to Jeffrey.
“[W]e submit this is a realization at which PayPal arrived earlier than others, and has been focused on investing against,” he wrote. “While Adyen, for example, spends heavily to build organic omnicommerce share, we think PayPal can focus on better [e-commerce] monetization” and can add omnichannel commerce capabilities through mergers and acquisitions.
See also: Is Adyen’s pain PayPal’s gain?
“Combined with compelling valuation, what the market views as broadly disappointing could put in the ultimate PYPL bottom,” he continued.
Jeffrey said he sees “unappreciated optionality at PayPal” bolstered by the company’s roughly $6 billion in net cash and its potential to deliver almost $20 billion in cumulative free cash flow through 2025. While his model assumed the company will continue with buybacks, Jeffrey said he thinks PayPal’s next chief executive will consider some M&A.
“We have long held that PayPal needs to acquire a card-present processor to boost its Venmo and in-store monetization initiatives,” Jeffrey wrote. “This may be even more relevant today as Adyen and others, like Shift4, invest to build omnichannel franchises.”
In his view “prudent and thoughtful M&A” could help drive “a material positive re-rating” in PayPal shares alongside some of the other factors Jeffrey highlighted.
He noted that shares of Block Inc.
SQ,
the parent company of Square and the Cash App, have also been under pressure lately, and he said that “patient investors” might want to revisit this name as well.
“We think Block is starving its Square ecosystem of investment as the co focuses on profitability,” Jeffrey said, though he thinks this is a mistake. While Block’s stock could tread water until growth reaccelerates in the Square business during the first half of 2024, he doesn’t think the business is losing structural market share.
“The forgotten pair deserves another look,” Jeffrey said of Block and PayPal shares, both of which he rated a buy.
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