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BofA downgrades PayPal, Toast stocks to 'Neutral'

Bank of America downgrades fintech company PayPal (PYPL) and restaurant software developer Toast (TSOT) stocks from "Buy" to "Neutral." Bank of America Senior Equity Research Analyst Jason Kupferberg joins Yahoo Finance Live to comment on the payment industry and buy now, pay later space.

"Now let's look forward to 2024 — what can possibly get this sector out of its rut?" Kupferberg asks. "Number one, greater visibility on forward estimates in 2024, and along with that what we're talking about is really increased confidence in a soft landing scenario. Now, that's the base case that Bank of America's economists are calling for."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video transcript

- Jason, thank you so much for joining us. And actually, I just want to start maybe higher level, Jason. Because as you point out, it's been kind of a rocky couple of years for a lot of names in the payment space. Maybe Jason, just for our audience, for our viewers, could you explain sort of broad strokes why that is and what the sector needs to do to kind of get out of that rut?

JASON KUPFERBERG: Well, first of all, thanks very much for having me. It has been a really tough couple of years. And there's a couple of reasons for that. One being some of these companies really flourished during the pandemic and really had trouble adjusting to the post-pandemic normalization of consumer behaviors.

Another reason would be a lot of macro concern about the health of the US consumer. Were we going to go into recession? Were we not? What are consumers buying, discretionary goods, non-discretionary goods? And so all of these cross currents created a lot of consternation for investors. And I would say that these concerns were really a combination of cyclical and in some cases structural, in other words, shifts in the competitive landscape, who was gaining share, who was losing share.

So now, let's look forward to 2024. What can possibly get this sector out of its rut? We identified a couple of potential dynamics that could do just that. Number one, greater visibility on forward estimates in 2024. And along with that, what we're talking about is really increased confidence in a soft landing scenario.

Now, that's the base case that Bank of America's economists are calling for. And we think that as we go through the year to the extent that confidence builds in that scenario, then people will be more comfortable with where forward estimates are. And therefore, they'll be comfortable putting a higher multiple on those estimates. And hence, we could see appreciation that way.

Industry M&A is a possibility. We did see a couple of transactions in the second half of 2023. If there's a pickup in that activity in a more stable interest rate environment in 2024, that could be a catalyst. And then the third would simply be potential investor rotation out of other subsectors, either in tech or in financials. Payments kind of sits at the intersection of those two industries. So those are really the three factors that we're looking for in 2024 to break payments out of this rut.

- Hey, Jason, I'm also curious. When you talk about sort of the secular or structural changes that we're looking at in the industry, I'm curious about the effect of buy now, pay later. I mean, when you talk about the competitive landscape, that's been part of it. Some of the companies that you talk about do that. But then there are some pure plays too. How is that sort of changed how these companies operate and how they do?

JASON KUPFERBERG: Some of our companies have definitely made a bigger play into buy now, pay later. Now, on the pure play side, we do cover a firm. And a firm's mission has been buy now, pay later at its core from day one.

Then we have companies under covered such as PayPal, which, about three years ago, launched their own buy now, pay later service. And we also cover Block, formerly known as Square, who, as many of you probably know, made a big acquisition of a company called Afterpay, which was a pure play buy now, pay later provider. They did that acquisition almost two years ago.

So what we are seeing is some shift in consumer preferences. We are seeing in a certain consumer demographic-- this isn't for everyone, but for a certain consumer demographic the flexibility of being able to expand your purchasing power, particularly in the case of a 0% APR offer, definitely has its appeal. And we think buy now, pay later is a payment method that is here to stay.