Jefferies on Wednesday downgraded shares of digital payments company PayPal, citing normalizing consumer conditions and a lack of positive catalysts. The firm lowered its rating on PayPal to a hold from buy. Analysts also cut the price target on the stock to $200 from $255. The new projection is 4% higher than PayPal's close Tuesday. "We are incrementally more cautious on the fundamental backdrop in 2022 and believe multiple expansion potential is limited until investors can restore confidence in PYPL achieving its medium-term targets," Jefferies' Trevor Williams said in a note. PayPal's stock lost 19.5% in 2021, compared with the S & P 500's nearly 27% gain. Shares closed Tuesday 38% off their 52-week high notched in July 2020. The stock is up 1.8% so far in 2022 but was off 1.7% in premarket trading Wednesday. E-commerce lost steam throughout last year as customers returned to in-person shopping. Spending on e-commerce made up 18.1% of addressable retail scales in the fourth quarter of 2021, according to the Jefferies analysis. That proportion was at 22% in 2020. "Consumer spend has migrated back to brick & mortar retail with the economic reopening in FY21," Williams said. Average transaction sizes are also normalizing. Across payments companies, the measure declined in the third quarter of 2021. "If avg. transaction sizes continue normalizing back towards pre-COVID levels, accelerating engagement growth in FY22 is needed to hit consensus" total payment volume Williams said. "This dynamic has not received much attention from investors, but we believe warrants close attention." Higher transaction expenses and credit losses projected for fiscal year 2022 and 2023 should cut into profit as well, according to Jefferies. Tougher quarter-over-quarter comparisons and the continued drag of eBay make up for a tough environment, Jefferies said. "To be clear, we do not believe anything is 'broken' in the business (evidenced by the strong top-line growth ex-EBAY) nor do we believe competitive pressure from the likes of Shop Pay have begun to pressure wallet share or pricing yet," Williams wrote. "Our call is simply that in the absence of greater confidence in PYPL." —CNBC's Michael Bloom contributed reporting.
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Jefferies on Wednesday downgraded shares of digital payments company PayPal, citing normalizing consumer conditions and a lack of positive catalysts.