Analyst Downgrade Highlights Mounting Challenges for PayPal

A significant downgrade from Morgan Stanley has cast a shadow over PayPal's near-term prospects. The prominent investment bank shifted its rating on the digital payments firm to "Underweight" from its previous stance, concurrently slashing its price target by 31% to $51 from $74. According to analyst James Faucette, four persistent headwinds could weigh on the company's performance for years to come.

The analysis points to two major structural concerns. First, PayPal's branded checkout business, its fundamental offering for merchants, is losing ground. Faucette notes the company was slow to modernize this product, and recent revitalization efforts under new leadership are progressing more slowly than anticipated, showing limited impact on user engagement. This has resulted in market share losses to competing digital wallets and is expected to lead to sustained pricing pressure.

Second, the emergence of "Agentic Commerce"—where purchases are made through AI assistants—presents a long-term risk. The analyst is skeptical that PayPal will play a significant role on these future platforms, citing historical weaknesses in technology integration compared to rivals like Stripe or Adyen.

Stumbling Blocks: Venmo and Profitability

Expectations for Venmo, PayPal's popular peer-to-peer payment app, have diminished. After years of slow progress in expanding merchant acceptance, Faucette believes the window for successfully monetizing the platform has largely closed. Increased competition in the P2P segment further complicates the outlook.

Should investors sell immediately? Or is it worth buying PayPal?

On the financial front, earnings projections are under pressure. The analyst anticipates downward revisions to adjusted earnings per share and projects transaction margin dollar growth of just 3.3% for 2027—far below previously targeted high-single-digit rates. Increased investment and marketing spending to defend market share are adding to the strain. While strong cash flow conversion of 120% could support share buybacks, Faucette expects management will likely need to walk back its mid-term financial targets.

A Glimmer of Strategic Hope

In a recent strategic move, PayPal submitted applications for a bank charter in Utah on December 15. The proposed "PayPal Bank" aims to expand the company's small business lending operations and reduce dependence on third-party banking partners. Since 2013, PayPal has extended over $30 billion in loans to more than 420,000 business customers globally. However, regulatory approval for the charter could take years, a timeline too extended to address the immediate challenges identified.

Mixed Sentiment Across Wall Street

Morgan Stanley is not alone in its cautious stance. Other firms have also adjusted their outlooks: Compass Point recently reaffirmed a "Sell" rating with a $56 price target, and Evercore ISI reduced its target to $65 from $75. Overall, the analyst consensus remains guarded. Of 38 analyst ratings covering the stock, four recommend "Sell," 22 advise "Hold," and twelve suggest "Buy." The average price target among them stands at $78.97.

Market participants are now looking ahead to the release of Q4 2025 earnings, expected in late January. Consensus estimates project adjusted earnings per share of $1.29, which would represent an increase of 8.4%.