There’s plenty of good news for PayPal’s (ticker: PYPL) stock, according to analysts. The payment app simply needs to reign in its spending.
According to Mizuho Securities analysts, the stock is given a Buy rating because the team believes it has the potential to boost margins by more than 10% if it focuses its energy on its already profitable core business, as opposed to spending heavily on sales and marketing as well as research and development.
Investors might welcome the company with a refocused strategy, as PayPal shares are off by more than 50% this year after winning big during the pandemic-induced e-commerce wave of 2020 and 2021. In April, the company reduced its full-year outlook on worries over lower transaction volume.
Dolev and his team set a price target of $120 on PayPal shares, which is 43% higher than recent trading levels. According to them, by 2026, shares could pass $150 a piece, assuming PayPal is able to generate free cash flow in the range of $25 billion to $30 billion and repurchase shares. This would essentially convert to earnings of $7 to $8 per share. Historically, PayPal has traded at 20 times earnings, and this makes the prediction a likely occurrence.
However, PayPal’s potential has been disrupted by what Dolev said were “ambitious plans,” such as building a “Super App” and diving into cryptocurrencies. Those efforts don’t come cheap, and if PayPal could get its spending under control like its peers Visa (ticker: V) and Mastercard (ticker: MA), its margins would improve.
Roughly 16% of PayPal’s revenue was spent on sales and marketing last year, while its industry peers spent in the mid-to-high-single digits, Dolev wrote. PayPal’s R&D spending stands at roughly 20% of revenue, which is higher than the disclosed figures of some other payment companies.
PayPal shares climbed 2.5% in morning trading hours on Thursday.