PayPal Faces Challenges Amidst Modernization Efforts

PayPal Holdings Inc. is making strides in its efforts to modernize its platform, but Evercore ISI analyst David Togut remains skeptical about the company's stock. Following their second-quarter earnings report, Togut downgraded PayPal shares from outperform to in-line.

The report highlighted ongoing pressure on transaction margins, particularly due to the rapid growth of low-take-rate and transaction-margin Braintree. Togut expressed concerns about the potential increase in loan-loss reserves resulting from growing credit losses on PYPL's business loan book.

PayPal shares initially opened higher the following day but declined by 0.8% after a significant 12.3% drop during Thursday's trading session. This downward trend is expected to continue into a fourth trading day.

Togut pointed out that the company lacks a clear path for expanding transaction margins year-over-year, limiting potential earnings outperformance, despite accelerated growth in branded PayPal wallet volume for June and July. As a result, Togut lowered his price target to $65 from $85.

Competition also poses a concern for PayPal, as Apple Pay gains popularity in online checkout and offers consumers alternative payment options with its 1-click checkout feature. Despite this competition, Chief Executive Dan Schulman remains optimistic about PayPal's branded checkout business, anticipating growth at or above the rate of overall e-commerce growth moving forward.

As the company faces these challenges, it is crucial for PayPal to find innovative ways to maintain its momentum and navigate the evolving market landscape.