PayPal ‘now risks getting disrupted’ by competitors, analyst says in downgrade

Rawat worries about the “increasing aggregation” of e-commerce activity on large platforms like Amazon.com Inc. AMZN, +0.47% and Shopify Inc. SHOP, -1.74%, which she estimates are together responsible for about 32% of U.S. commerce.

“Amazon currently doesn’t accept PayPal and just agreed to accept Venmo starting in 2022,” she wrote. “Shopify has ambitions of creating its own payments business and has been pushing its merchants aggressively to convert to Shopify payments platform (and also towards the Shop Pay button).”

Smaller merchants “are PayPal’s bread and butter, and Shopify’s meteoric rise and push towards its own payments platform is particularly problematic,” Rawat continued. PayPal’s transaction economics are better with smaller businesses than with very large ones, she argued. Shopify Inc. represents an “unassailable competitor” when it comes to the small-business demographic, in her view.

Rawat is also concerned that PayPal’s market-share gains will slow. The company has typically won share at the expense of manual card entry onto a website, but fewer consumers are entering their card information this way, she said, meaning there is less available land to grab there. She estimates that manual card entry now accounts for about 20% of e-commerce checkout, down from roughly 33% four years back.

More broadly, she thinks that share gains could slow “by a thousand cuts” thanks to the rise of a number of technologies that separately eat away at opportunities for PayPal. These include the growth of buy-now pay-later (BNPL) services, the ability to auto-fill credit-card information on some web browsers, and the threat of Apple Pay as ever more commerce shifts online.

“It is an understatement to say that the payments landscape is rapidly evolving with many powerful trends emerging,” Rawat said in her note to clients. “While PayPal is actively investing and evolving, it simply has more turf to defend versus peers in our view.”

Rawat acknowledged that her thesis could prove incorrect if PayPal delivers upbeat surprises with its efforts to drive more revenue from its Venmo app and its “superapp” redesign that focuses on features beyond just payments.

“After years of false starts, we believe Venmo is finally on the cusp of getting monetized,” she wrote. While Rawat has “historically been skeptical of aggressive monetization estimates for Venmo,” she feels more “constructive” now. “Venmo monetization is now less about following the PayPal playbook and more about following Cash App’s journey,” she wrote, referencing Square Inc.’s SQ, -1.95% mobile wallet.

Shares of PayPal have declined 20% over the past three months as the S&P 500 SPX, -0.17% has risen about 6%.