Banking & Finance

Why This Analyst Sees 30% Upside in PayPal

Chris Lange

Is PayPal Holdings Inc. (NASDAQ: PYPL) a growth stock or a value stock? The answer may depend on whom you ask. And maybe that answer is both. Wedbush Securities sees 30% upside in PayPal shares. The firm sees some growth and some value here.

A research report from Friday, January 20, 2017, showed that Wedbush’s Moshe Katri assumed coverage of PayPal with an Outperform rating and assigned a $54 price target. If the firm is right, this represents some 30% upside from PayPal’s prior closing price of $41.27.

Here is the big question for investors: Does Wedbush’s valuation of 26 times the consensus 2018 earnings estimate imply more growth or value?

Wedbush pointed to a host of catalysts in its report, including explosive transaction growth in the mobile payments space, incremental revenue growth from Xoom, and the ability to monetize its popular P2P engine (Venmo). The firm also believes that over time, given the recent agreements with Visa and MasterCard, PayPal will be able to scale and expand margins. Wedbush believes that PayPal is well positioned to post 15% to 20% and 10% to 15% in revenue and adjusted earnings per share growth, respectively, during the next few years.

As recently as 2015, mobile payment usage in North America represented 40% of total payment volume, and mobile payment adoption is expected to continue to expand.

PayPal’s acquisition of Xoom, with 1.5 million users of P2P money transfer globally, could provide incremental revenue growth opportunity, with the potential to disrupt the global remittance market with nearly $600 billion in transaction volumes.

Wedbush commented on PayPal’s relationship with Visa and MasterCard:

We believe PayPal’s recent agreements with the major networks to eliminate steering and share transaction data can be a significant driver of volume growth over the long term, removing potential competitive concerns. In addition, the benefits from volume acceleration, reduced onboarding friction, fee concessions, access to tokenization, and the ability to work directly with issuers will likely offset a potential dilutive impact from terminating steering. Finally, recently, PayPal signed an agreement to make Discover cards more widely available on the PayPal platform. As part of the agreement, Discover card holders will also have access to their rewards programs for online and mobile purchases, where PayPal is accepted. The Discover deal gives PayPal access to nearly $30 billion in incremental quarterly payment volume.

Shares of PayPal were last seen trading up 0.7% at $41.57, with a consensus analyst price target of $46.60 and a 52-week trading range of $31.35 to $44.52.