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The Ratings Game: PayPal stock falls after downgrade as analyst worries about margin impacts of its ‘engine’

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PayPal Holdings Inc. continues to see traction with its Braintree online-payments product, but that may not be all good news, according to an analyst.

Susquehanna’s James Friedman downgraded PayPal shares
PYPL,
+1.10%

to neutral from positive Tuesday, warning that Braintree’s growing prevalence within the broader PayPal business could have negative impacts on the company’s margins and its take rate, or the company’s cut of each transaction.

While PayPal is best known for its namesake mobile wallet and checkout button, the company also owns Braintree, which allows retailers to accept online payments more broadly.

See also: PayPal is ‘clearly now at a turning point,’ its CEO says

By Friedman’s estimates, Braintree accounted for 31% of PayPal’s total payment volume last year, and he projects that the company could see that portion grow to 44% by 2023. In such a scenario, Braintree could account for perhaps 72% of PayPal’s overall growth in volume next year.

“Braintree is the engine fueling PYPL—but it guzzles take rate and margins,” Friedman wrote in his note to clients.

In his view, the consensus outlook “may underestimate the yield and transaction-expense pressure which PYPL may experience” from Braintree’s growing share of PayPal’s business mix. He said that Braintree has higher transaction expenses and lower gross yields than the main PayPal business.

He added that “margin leverage from headcount management and the potential externalization of PYPL’s consumer credit book may not be enough to offset” the potential Braintree margin impacts.

Friedman also has some macroeconomic concerns about PayPal in light of FedEx Corp.’s
FDX,
+1.17%

recent announcement that it would be yanking its full-year outlook. The logistics company also indicated that it expected to sharply fall short of profit estimates for its latest quarter.

Read: Why FedEx’s profit warning is such bad news for the U.S. economy

FedEx “called out challenges in its FedEx Express segment, Asia, and Europe,” Friedman wrote. “Given PYPL’s high international exposure, we note potential for weakness in shopper trends and PYPL’s TPV.”

He cut his price target on PayPal’s stock to $100 from $115.

PayPal shares are off 2.5% in premarket trading Tuesday. They’ve lost half their value so far this year, as the S&P 500
SPX,
+0.69%

has dropped 18%.

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