PayPal Shares Face Third Downgrade Amid Core Business Concerns

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PayPal's stagnant performance in its fundamental operations is drawing a sharp response from Wall Street. In a significant move on Wednesday, Morgan Stanley downgraded the financial services provider's stock to "Underweight," marking the third such negative revision by a major bank in a matter of weeks. Analysts point to a slowdown in the traditional checkout business and a yet-to-materialize bet on AI-driven commerce as central reasons for the growing pessimism.

Morgan Stanley's action is part of a recent pattern. This follows similar downgrades from Baird, which shifted its rating from "Outperform" to "Neutral" with a $66 price target, and Bank of America Securities, which moved from "Buy" to "Neutral" with a $68 target. Both firms cited disappointing transaction volumes and lackluster progress in PayPal's core checkout segment as key concerns.

Morgan Stanley's Drastic Cut and Structural Critique

Morgan Stanley analyst James Faucette didn't just downgrade the stock; he slashed the price target by 31%, from $74 to $51. His rationale outlines four structural challenges facing the company: the checkout business is losing market share to competing digital wallets; the rise of AI-powered shopping agents presents a long-term headwind; the monetization of Venmo has effectively stalled; and profit expectations are likely to decline further due to sluggish growth coupled with rising marketing expenses.

Faucette's projections are notably grim, forecasting transaction margin growth of only about 3.3% by 2027. This falls far short of the high single-digit rates management had previously targeted.

Expansion Efforts: Stablecoins and Banking

Amid these challenges, PayPal is pushing forward with expansion initiatives. On Wednesday, the company announced a partnership with USD.AI to utilize its PYUSD stablecoin for financing AI infrastructure, including GPUs and data centers. Starting in January 2026, a one-year program will offer a 4.5% yield on deposits of up to $1 billion.

In a significant adoption move, US-based YouTube creators will soon be able to receive payouts in PYUSD. This represents one of the most prominent use cases for the stablecoin, which currently ranks as the sixth-largest by market capitalization, valued at approximately $3.9 billion.

Separately, on December 15, PayPal applied to establish the PayPal Bank—a Utah-licensed industrial bank with FDIC insurance. If approved, this entity would offer credit solutions to small US businesses, expanding PayPal's financial services beyond pure payment processing.

Skepticism Over the AI Commerce Strategy

The company is attempting to position itself as an infrastructure layer for AI shopping platforms like ChatGPT, Perplexity, and Google Gemini. Through a partnership with Logicbroker, it aims to provide thousands of merchants with access to its AI commerce services.

However, Morgan Stanley's Faucette remains unconvinced. He expresses skepticism about significant incremental usage of PayPal on such platforms, pointing to a "history of poor tech integrations," especially when compared to rivals like Stripe or Adyen. While PayPal notes that over 40% of Americans may begin their product searches on AI surfaces this holiday season, converting those searches into actual transactions remains the critical hurdle.

Shares Near Lows as Core Business Struggles

PayPal's stock is currently trading close to its 52-week low, standing more than 43% below its yearly high of over €89. For a sustained recovery, the company must regain momentum in its core operations. The recent chorus of analyst downgrades suggests that confidence in such a turnaround is currently in short supply.