Raymond James upgrades PayPal, says stock can rally nearly 30%

Published Wed, Sep 14 20228:46 AM EDTUpdated Wed, Sep 14 20228:46 AM EDT

Raymond James sees strong upside for PayPal going forward. The firm on Wednesday upgraded shares of the payment company to outperform from market perform and set a $123 price target, implying the stock could surge 29%. Raymond James has grown confident that PayPal's forward estimates have bottomed after challenging quarters and that the depressed multiple should move higher as forecasts rebound. "In our view, PYPL is exactly the type of stock you want to own in this tape – defensive growth driven by secular tailwinds, significant FCF generation, clean balance sheet, FY23 estimates biased higher not lower -- all at a reasonable valuation (5.6% FCF yield)," wrote analyst John Davis in a Wednesday note. "As such, we recommend investors initiate or add to positions at current levels." The company is also set up for a stronger second-half to the year as its other value-added services should benefit materially from rising rates, according to Davis. "The bottom line is that we believe current Street estimates do not fully reflect incremental revenue from rising rates within [other value-added services], which could help offset to any macro related transaction revenue weakness in 2H22/FY23," he wrote. The firm's math suggests that OVAS could see up to $900 million of incremental revenue in the full year 2023 based on the current Fed funds forward curve. The company also recently approved $15 billion in share buybacks, which should also lift the stock in the coming years. "We note management's commentary of at least 50 bp of margin expansion in 2023 appears woefully conservative as the incremental $400M of opex savings is ~130 bp boost to the margin," wrote Davis. "Additionally, we believe the company could cut as much as an incremental $700M of non-transaction related opex if needed which would add ~$0.50 to EPS." All in, Raymond James sees a comfortable runway for double-digit growth for PayPal in the coming years and is confident in recommending shares again. —CNBC's Michael Bloom contributed reporting.