PayPal Holdings shares dropped 7% in premarket trading as the payments processor cut its annual revenue forecast, warning of a bleak holiday quarter as consumers cut back on discretionary spends.

Decades-high inflation has hit the purchasing power of consumers who also have to contend with the threat of a looming recession.

PayPal said lower- and middle-income households had started to cut discretionary spending, as they grapple with higher prices of food, energy and gas.

"Given a challenging macro environment, slowing e-commerce trends and an unpredictable holiday shopping season, we are being appropriately prudent in our Q4 revenue guide," Chief Executive Daniel Schulman said in a call with analysts. The San Jose, California-based company cut its adjusted revenue growth outlook to 10% from 11% forecast earlier.

The company also said holiday-quarter e-commerce spending was likely to grow in low single digits, in line with expectations from several companies including Mastercard, which last month forecast downbeat fourth-quarter revenue.

"E-commerce remains in precarious territory with trends deteriorating through the quarter and an uncertain backdrop, increasing the possibility that not much improvement may materialize next year," KBW analysts wrote in a note and slashed the price target on the stock to $95 from $115.

At least four other brokerages including J.P. Morgan and Jefferies lowered their price targets after results.

  - Reuters