PayPal (PYPL) Takes a Hit in Stock Price After BMO Downgrade

Of all the stocks that should be on top of the world right now, a stock that pretty much encourages people to never touch currency or each other should be pretty close. You'd think so, anyway, but as far as PayPal (NASDAQ: PYPL) is concerned, it just took a serious step downward. BMO Capital Markets' James Fotheringham released guidance on the stock that took it down from “outperform” to “market perform,” for some rather odd reasons.

Did It Actually Have Anything to Do With PayPal Itself?

Fotheringham's PayPal guidance told a bizarre story of motivation; the shift came, as Fotheringham put it, “...due exclusively to our shift in investment strategy towards credit-sensitive sub-sectors.”

If that sounds puzzling, it gets worse. While Fotheringham pointed out that PayPal has made excellent advances with its two-sided network operations, has put a lot of time, effort and resources into bolstering Venmo and making it a paying proposition, purchasing Honey, and investing in its edge in digital commerce, that's still not enough to recommend PayPal to investors.

Why not? Because of recent analysis run via a balance-sheet simulation model that suggests that those “credit-sensitive” names, like big banks and certain lending operations, are more likely to have the necessary earnings power to swallow incoming loan losses, and without having to draw cash from equity markets.

...What?

Given the fact that PayPal is currently knocking the S&P 500 into a cocked hat—it's up 17% over the last three months while the S&P 500 is down 16%—it's kind of hard to countenance how the stock isn't recommended. Here's the strangest part; even as Fotheringham downgrades the stock, he's also established a price target on it that's not only well above consensus, but also well above current levels.

As of this writing, PayPal is trading at $143.91. That's a little off its close yesterday at $144.41, but also off its lows for the day down around $142.38. The BMO price target for PayPal? $156. Just to add bizarrity to confusion, the consensus price objective is well below all of these current figures at $125.65.

A Victim of High Expectations

Just a week ago, some analysts were expecting PayPal to keep its first quarter earnings going strong into the second quarter, which objectively, is a feat only a handful of pharmaceutical companies and “essential” retailers have been able to match. That alone should make it a draw for investors looking for some kind of stability in this market.

Though admittedly, the company's first-quarter wasn't exactly a winner; PayPal's earnings for the first quarter came out to $4.62 billion, which was under consensus estimates of $4.74 billion. However, the earnings proved a win for PayPal itself, as the revenue posted represented a 12% increase over the same time in 2019.

PayPal also saw disappointing growth in its total payment volume. Though payment volume was up 18% on the previous year, reaching $191 billion, consensus estimate expected $195.2 million instead.

A Market it Should be Winning

Essentially, so far, PayPal's biggest problems have been that it's not growing fast enough to suit the consensus and that it's basically in the wrong industry to suit the analysts. On an objective level, PayPal has a lot of room to win here; this is a market tailor-made for online shopping. It's the only thing keeping some businesses running right now, and it's also the only bright spot in an otherwise disastrous report about retail markets recently. We called it a “buy” about six weeks ago.

If PayPal does anything, it facilitates online shopping. Between its original connection to eBay, its foray into mobile payments, and its newly-minted connection to a major rewards program in Honey, PayPal has made itself a mobile payments leader. It's even managed to step into the physical world, though perhaps not quite so enthusiastically as some might prefer. Not many stores, sadly, will take your PayPal balance for goods and services, but it transfers into a bank account sufficiently readily to make up the gap.

While the BMO Capital Markets downgrade seems to be more a matter of internal paper-shuffling than an actual reflection on the company itself, it seems pretty clear that PayPal's doing well as it is. It's also pretty likely to keep doing well, especially as social distancing continues to stay a part of our lives, even if, thankfully, a receding part.