Morgan Stanley initiated coverage on PayPal with an equal weight rating, citing concerns over margins with some compression on take rates. The company was given a $40 price target, and is expected to perform roughly in-line with markets. Morgan Stanley’s James Faucette mentions that margins are capped, which asserts a reduced take-rate on transactions:We view the most optimistic bull scenarios for PayPal as being blunted because of limits on margin expansion given higher variable costs when compared to payment networks like V and MA. Instead, we expect that PayPal OMs will remain roughly stable at 21-22% over the next 3 years particularly as it seems increasingly less likely that there will be substantial incremental shift to ACH (increased ACH-based transactions would have a positive impact on margins). The analyst goes onto justify his $40 valuation:Remain EW as value from better collaboration is built in and impact from new initiatives remains to be seen: We remain EW but raise our PT to $40 (vs. prior $36), derived using a 28x C2017e P/E based valuation, supported by our DCF ($47 value/share). At that multiple, we see PYPL as at least fully valued, particularly given its premium valuation vis-à-vis V and MA (at 20.5x and 22.4x 2017 EPS), and even as we expect the company to expand its platform capabilities, we expect that the time to meaningful impact is likely to be a long one. Key potential upside drivers include potential M&A, better than expected traction in ability to monetize Venmo, potential for restructuring activity to drive meaningful margin expansion. The analysis makes sense given limitations to PayPal’s strategy as purely an online payment processor, and valuation capped to peer set comparisons. Needless to say, further expansion into emerging markets will put pressure on margins as there will be less ACH based transactions. Furthermore, the stock doesn’t have any near term catalysts with the exception of the upcoming earnings report. All around, PayPal isn’t high up on my list of outperforming stocks, and it shouldn't be on your list either.