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PayPal Stock Slides As Investor Day Leaves Analysts With Questions

Digital payments giant PayPal ( PYPL ) was down midday Thursday, after its investor day showcased its ambitious plans but failed to alleviate Wall Street’s fears of competition. Management emphasized the breadth of the platform, covering not only the traditional online payment capability but newer technologies at point of sale, ATMs, social media and customized applications for merchants. Executives hope to entice consumers to put more of their spending through PayPal by offering budgeting and money-management capabilities, while enticing merchants with the PayPal Credit offering. The OneTouch payment app has also taken off as a response to the increasing number of purchases made over mobile phones. Management also discussed the rise of “contextual commerce,” the trend toward technologies predicting consumer buying habits and bringing products to the consumer rather than the consumer going out and seeking them. Repeatedly, they pointed to the sheer size of PayPal’s network, after 17 years of existence, as bringing a key advantage over competing platforms in penetrating these new markets. However, Pacific Crest analyst Josh Beck wasn’t so sure. “PayPal highlighted a dramatic shift in commerce, underscored by diverging performance at Target ( TGT ) and Amazon ( AMZN ), which creates opportunity and risk,” Beck wrote in a research note. “Whether PayPal will be able to retain its competitive moat as Apple ( AAPL ), Amazon, Stripe and Visa ( V ) focus on mobile and contextual commerce remains unclear to us.” Beck retained a sector weight rating on PayPal stock. Margins Remain A Concern Management affirmed previous financial guidance, including that profit margins will be “stable to up.” Pretax margins took a definite hit last year as the company has invested in new projects, such as the recently acquired financial-remittance company Xoom. “While we believe management did an exceptional job explaining Paypal’s differentiation (serving both consumers and merchants; expanding relevance by providing solutions from Braintree, Paydiant, PayPal, Xoom and Credit), an intensifying competitive landscape, combined with the company’s margin outlook remain our biggest concerns,” wrote Sterne Agee CRT analyst Moshe Katri in a research note affirming his neutral rating. Credit Suisse analyst Paul Condra, who holds a buy rating on the stock, emphasized the positive. “Our conviction on the stock was strengthened from (1) commentary that the credit business is not more than high single digits percent of profit (well below speculation of around 25%) and will likely not grow beyond 2% to 3% of payment volume; and (2) increased visibility on growth outlook as management expects to double payment volume in four years, implying 20% total payment volume growth through 2019,” Condra wrote. PayPal stock was down nearly 3.5% in midday trading on the stock market today , near 37.50. The stock holds a good IBD Composite Rating of 88 but its Accumulation/Distribution Rating has been deteriorating lately, to a grade of D+, indicating more institutions are selling than buying. RELATED: Apple Pay Rival MCX, Visa Loom At PayPal Analyst Day

Amazon Poised To Become No. 1 U.S. Apparel Retailer By 2017

E-commerce leader  Amazon.com ( AMZN ) will become the No. 1 U.S. apparel retailer next year, investment bank Cowen predicted Wednesday. Cowen analyst John Blackledge said recent earnings reports by Amazon and Macy’s ( M ) painted a clear picture. “In light of Amazon and Macy’s recent results, we feel more confident that Amazon will displace Macy’s as the No. 1 U.S. apparel retailer by 2017,” Blackledge said in a research report. “Amazon’s Apparel & Accessories business is one of the key drivers of Amazon’s EGM (electronics and general merchandise) segment.” Amazon’s success in the apparel category is being driven by a dramatically larger selection, ramping brand relationships, superior fulfillment and technology innovations. Amazon is growing in the clothing business, while traditional retailers such as Wal-Mart ( WMT ) and Target ( TGT ) are in decline, Blackledge said. In the first quarter, the number of Amazon apparel purchasers increased 19% year over year, while apparel buyers at Wal-Mart and Target fell 1% and 5%, respectively, he said. “The longer-term trend also reflects a share shift in apparel purchasers, with Amazon apparel purchaser growth of 28% each quarter (on average) since 2014, while apparel purchasers fell 4% and 3% at Wal-Mart and Target,” he said. “In Q1, Amazon had 15% more apparel purchasers than Wal-Mart (vs. 24% fewer in Q1 2014) and 37% more apparel purchasers than Target (vs. 4% more in Q1 2014).” Macy’s on Tuesday reported soft Q1 sales and slashed its full-year forecast, sending its stock diving to a four-year low Wednesday. The Cleveland-based company said its first-quarter sales fell 7.4% year over year to $5.77 billion. Analysts on average were looking for $5.93 billion in sales. For 2016, Macy’s now expects same-store sales to fall 3% to 4%, compared with its prior guidance for a 1% decline. Macy’s stock was down 14%, below 32, in afternoon trading on the stock market today . Amazon stock was up 1.5%, near 716. On April 28, Amazon reported its highest sales growth in nearly four years . Its Q1 revenue jumped 28% to $29.1 billion, ahead of the $28 billion view.

Obama Fostering Uncertainty Over Smartphone Encryption Issue

The contentious issue over whether the U.S. government should be able to force tech companies to weaken security on their smartphones and software apps so that law enforcement agencies can access private data isn’t likely to be resolved soon. But it could be. All it would take is for President Barack Obama to make a statement supporting strong encryption on tech devices and Internet services. Obama holds himself up as a tech-savvy president, but his lack of leadership on the encryption issue has prolonged the dispute between the federal government and tech firms, tech groups and privacy advocates say. “The White House should be leading on this issue,” said Cindy Cohn, executive director of the Electronic Frontier Foundation (EFF). “President Obama is trying to be the best tech president ever. He’s got really good technical consultants, and the idea that he wouldn’t listen to them is shocking.” The tech industry is united in its call to keep encryption strong, saying that weakening software security or creating back doors for authorities to bypass privacy protections opens the door for hackers and criminals. “The math doesn’t change,” Cohn said. “The math is the problem that the FBI has, which is: They cannot build a back door that only they can use. It doesn’t matter which technical expert you bring to bear on it. … This isn’t controversial in the tech community.” The FBI has sought court orders in two criminal cases to try to compel Apple ( AAPL ) to unlock password-protected iPhones. In both cases, the FBI ultimately backed down when it found other ways to access data on the devices. One involved paying a third party to hack the phone, and the other was resolved when the phone’s owner provided the password. Encryption Petition Quickly Surpasses 100,000 Signatures Last September, EFF, Access Now, and a coalition of nonprofit and industry groups launched a public petition calling on President Obama to defend strong encryption and oppose back doors. They used the We The People API, Obama’s preferred petition tool, and quickly surpassed 100,000 signatures. Despite the White House’s pledge to respond to petitions with 100,000 signatures within 60 days, it has remained quiet and is now four months overdue in its response. But if Obama doesn’t support strong encryption for businesses and consumers, perhaps the next president will. On Wednesday, 13 U.S. tech industry groups representing companies such as Apple, Amazon.com ( AMZN ), Facebook ( FB ) and Uber Technologies urged the two presumptive major party presidential nominees to support strong commercial encryption. The encryption stance is among a list of tech industry requests made in an open letter to Democrat Hillary Clinton and Republican Donald Trump. The trade groups asked the candidates to strengthen cybersecurity and encourage other governments to do the same. The letter urged the candidates to recognize the importance of encryption as a critical security tool and to advance policies that enhance data privacy. Groups signing the letter included the Consumer Technology Association, the Business Software Alliance, the Internet Association and the Semiconductor Industry Association. The encryption issue made headlines earlier this year when the FBI secured a federal court order to force Apple to unlock a smartphone belonging to deceased San Bernardino, Calif., shooter Syed Farook. Apple fought the order, saying it would set a dangerous precedent. To help educate the public, Apple CEO Tim Cook stepped up to become the face of consumer data security. He gave high-profile media interviews and made public statements about the importance of strong encryption. Apple’s fight to protect its encryption is about securing the data on all iPhones in use from bad guys, Cook said. That means securing customers’ data, including financial and health information, confidential business documents, private communications and photos. The FBI might have retreated in the cases of the San Bernardino terrorist and a Brooklyn drug dealer, but it is likely to pursue similar cases against tech companies in the future. Unless the White House tells it not to. Meanwhile, law enforcement supporters on Capitol Hill are crafting legislation that could force tech companies to comply with all law enforcement demands for customer data. Sens. Richard Burr, R-N.C., and Dianne Feinstein, D-Calif., have proposed the “Compliance With Court Orders Act of 2016.” As drafted, the legislation would require any individual or company to comply with any U.S. court order and hand over data to authorities, including data that is encrypted. The bill has been roundly criticized by civil liberties and digital privacy groups. No Encryption Bill Expected Until After Elections “I don’t think anything will happen in this session of Congress,” said Gary Shapiro, president of the the Consumer Technology Association. Political gridlock, especially during an election year, will ensure that no encryption bill is passed in Congress, he said. It is more likely that a court case will work its way up to the Supreme Court over the next couple of years, he said. Even if the FBI gets what it wants from the courts or Congress, the law would only be enforceable in the U.S. Foreign companies and their encrypted products would be unaffected, putting U.S. tech firms at a competitive disadvantage, Shapiro said. Public support for encryption is growing, especially in light of major data breaches at companies like Anthem ( ANTM ), eBay ( EBAY ), Home Depot ( HD ), JPMorgan Chase ( JPM ) and Target ( TGT ), as well as at government agencies, Cohn said. “We don’t live in a world where computer security is abstract and the damages and problems it causes for people are something that’s theoretical anymore,” Cohn said. “I think it strikes a lot of people as absurd that the government is engaging in trying to attack our security and undermine it and convince companies to give less of it when it should be their job to promote it.” Weakening security on mobile devices and software, says Shapiro, would destroy the confidence people have in businesses to keep their private data secure.