• Stocks are down 67% in the past 12 months as earnings growth slows
• Wall Street consensus rating is bullish
• The price target range is concerning
• The implied market outlook is moderately bearish through early 2023

Shares of payments technology platform PayPal (NASDAQ:) fell 54% so far in 2022 and are down 67% in the last 12 months. The online payment provider’s earnings growth has stalled, heightening concerns that the company lacks the lasting advantages needed to dominate the digital payments space.

While PayPal is huge, with over 400 million active registered accounts, there are a multitude of formidable competitors. Some focus on e-commerce and digital payment solutions such as Block (NYSE:) and Shopify (NYSE:). While Google Pay (NASDAQ:) and Amazon Pay (NASDAQ:) take advantage of the inherent benefits of being integrated into much larger ecosystems of products and services.

PYPL has expanded the scope of its “buy now, pay later” functionality with PayPal Pay and PayPal Credit, but the advantages they offer over alternatives are unclear.

Source: Investing.com

The San Jose, Calif.-based payments provider’s earnings growth has been very modest over the past two years. The fall in the share price brought the P/E down to 24.5, a level that is justified with fairly weak growth assumptions. The lack of EPS growth in recent quarters was clearly a downside catalyst and the modest setback in the fourth quarter of 2021, reported on February 1, triggered a rapid decline. There have been 29 downgrades analysts’ EPS forecasts over the last three months.

Source: E-Commerce

On February 1, the company a 33% drop new net asset accounts and a 1% decrease in GAAP EPS in FISCAL YEAR 2021, although net revenues increased by 17%. The company provided disappointing earnings forecasts for fiscal 2022, with lower GAAP diluted EPS compared to fiscal 2021 and non-GAAP EPS per diluted share essentially flat.

On , a week before the third-quarter 2021 earnings report on Nov. 8, I was cautiously bullish on short-term post-earnings performance, but neutral through mid-2022. Wall’s consensus rating Street in early November was bullish, with a 12-month consensus price target 40% higher than the stock price at that time. The options market, however, told a somewhat different story.

The price of an option on a stock reflects the market’s consensus estimate of the probability that the price of the stock will rise above (call option) or fall below (put option) a specific level (the price exercise of the option) by the expiration of the option . By analyzing put and call option prices at a range of strike prices, all with the same expiration date, it is possible to calculate a likely price prediction that reconciles option prices. This is called the implied market outlook and represents the consensus among option buyers and sellers.

In early November, the market’s implied outlook was slightly bullish through early 2022 and neutral through mid-2022.

With nearly six months since my last analysis, and with earnings to be reported after market close on April 27, I calculated the market’s implied outlook through the end of 2022 and compared it with the current outlook for the Wall Street consensus, as in my previous analysis.

Wall Street Consensus Outlook for PYPL

E-Trade calculates the Wall Street consensus outlook for PYPL by aggregating the opinions of 40 ranked analysts who have published ratings and price targets over the past three months. The consensus rating is bullish, as it has been for the past 12 months, and the 12-month consensus price target is 92% higher than the current stock price. The consensus uptrend is tempered by the large gap between individual price targets. The 12-month consensus price target tends to have predictive value for stocks only if the dispersion between the individual price targets is not too high. In fact, when dispersion is high, there is a negative correlation between the implied price target return and subsequent realized returns for a stock (a high expected return predicts a low future return). Generally, I strongly underestimate the relevance of the consensus outlook when the 12-month high price target is more than double the low, which is the case for PYPL.

Source: E-Commerce

invest.comThe Wall Street version of the consensus outlook is calculated using the ratings and price targets of 51 analysts. The consensus rating is bullish and the 12-month consensus price target is 93.3% higher than the current stock price, very close to the results of E-Trade.

Source: invest.com

While E-Trade and Investing.com agree that the 12-month consensus price target is around 93% higher than the current stock price, the high level of dispersion between individual price targets is a signal important alarm. The consensus rating calculated by both E-Trade and invest.com is bullish, but the continued optimism (shown in E-Trade results) over the past 12 months suggests that analysts are overly bullish on PayPal’s outlook.

Implied market outlook for PYPL

I have calculated the implied market outlook for PYPL for the 8.8 month period from now until January 20, 2023, using call and put option prices expiring on that date.

The standard presentation of the implied market outlook is a probability distribution of price return, with probability on the vertical axis and return on the horizontal.

Source: Author’s calculations based on E-Trade option quotes

The market’s implied outlook for PYPL points to high probabilities of negative returns over the next 8.8 months. The most likely outcomes are mostly returns below zero, a bearish view. The expected volatility calculated from this distribution is 56% (annualized), which is high for an individual large-cap stock and much higher than in my November analysis (when it was around 40%) . The higher expected volatility means the options market views PYPL as significantly riskier than it was towards the end of 2021.

To make it easier to compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution around the vertical axis (see chart below).

Source: Author’s calculations based on E-Trade option quotes

This view clearly shows the bearish slant of the market’s implied outlook, with probabilities of negative returns significantly higher than probabilities of positive returns of the same magnitude, across a wide range of most likely outcomes (the dashed red line is well above the solid blue line on most of the left two-thirds of the graph above).

The theory states that the implied market outlook should be biased negatively because investors, on the whole, are risk averse and therefore tend to pay more than fair value for downside protection (put options). There is no way to directly measure if this effect is present, but given the expectation of such a negative bias, it is suggested to interpret this implied market outlook as moderately bearish rather than strongly bearish.

Summary

PYPL is trading at a huge discount to its 12-month high and to the stock price 12 months ago. Shares fell because the company posted fairly anemic earnings growth and management forecasts suggest continued slow growth over the next year.

The consensus rating from Wall Street analysts is bullish and the consensus price target suggests the stock is significantly oversold. The consensus rating has been continuously bullish as PYPL has fallen, suggesting analysts may be collectively missing something.

Additionally, the high dispersion of individual price targets is a warning not to trust analyst consensus. The implied market outlook for PYPL is moderately bearish, with high volatility.

Given the current fairly low valuation (with a P/E of 24.5%), the bullish outlook from the Wall Street consensus and the moderately bearish outlook implied by the market, I am compromising on a neutral note until the start. of 2023.