After seeing its stock price cut in half so far this year, PayPal Holdings Inc. now seems to be slowly making its way back into Wall Street’s good graces amid improving business trends, a cost-cutting plan, and more measured optimism from the management team.
The company’s more favorable setup earned it an upgrade from Raymond James analyst John Davis, as he wrote Wednesday of his growing confidence in the company’s revenue forecast as well as his view that PayPal PYPL, -2.70% has a “safe” bar when it comes to 2023 earnings.
“Simply put, after several challenging quarters of meaningful negative estimate revisions…we now have increased confidence estimates have bottomed and expect PYPL’s depressed multiple…to grind higher as estimates rise,” he wrote, noting that PayPal’s 2022 estimates are down 33% from a year ago while its stock has lost 66% in that frame, compared with a 7% drop for the S&P 500 index SPX, -4.32%.
Shares are up more than 1% in premarket trading Wednesday.
“In our view, PYPL is exactly the type of stock you want to own in this tape,” he added in his note to clients, as PayPal offers “defensive growth driven by secular tailwinds” as well as a clean balance sheet, strong free-cash flow, and the potential for 2023 estimates to head higher.
Davis expects that PayPal’s Other Value Added Services (OVAS) revenue line will benefit from rising rates, with that possibility not fully reflected in current consensus estimates.
Additionally, he has confidence in the outlook for PayPal’s earnings per share headed into 2023. The FactSet consensus for 2023 EPS is $4.78, up from the 2022 consensus of $3.93.
“Given the combination of high margin incremental OVAS revenue from higher rates, the new $15 billion buyback authorization ($18 billion total or 16% of the market cap), as well as the potential to cut opex [operating expenditures] further if needed, we have a high degree of confidence the Street’s $4.78 is not only safe, but biased higher,” Davis wrote, as he upped his rating on PayPal shares to outperform from market perform.
He added that depending on the macroeconomic picture, he “wouldn’t be surprised” to see PayPal exceed $5 a share in earnings next year.
Of the 49 analysts tracked by FactSet who cover PayPal’s stock, 36 have buy ratings and 13 have hold ratings. While 74% of covering analysts were bullish at the end of 2021, just 57% are now.