Anyone who bought
stock last summer may be ruing the day. Despite popping a bit this past week, the shares, at $97, are still off 68% from their highs around $308. Memories of the stock’s skid in February, when it fell 35% over two days, may still be uncomfortably fresh in investors’ minds.
But set aside the wounds and buyer’s remorse. PayPal (ticker: PYPL) deserves a second chance. The company is making operational changes and talking up financial discipline. Its core business remains solidly profitable. As with other fallen giants—
(NFLX) comes to mind—there’s a budding bull case. Shares go for 21 times estimated 2023 earnings. While that’s a premium to the market, it isn’t steep for a company with earnings growth forecast at a roughly 20% clip.
At least one Wall Street activist likes the setup: Elliott Management. Known for its hardball tactics and takeover battles, Elliott recently took a 2% stake in PayPal, worth about $2 billion. That isn’t huge by activist standards or for Elliott, which runs $55.7 billion in assets. But it’s a sword of Damocles over management. “Tough love from Elliott should help PayPal win back lost credibility,” says Mizuho Securities analyst Dan Dolev.
PayPal CEO Dan Schulman, speaking on an earnings call this past week, said talks with Elliott have been “constructive and collaborative.” PayPal and Elliott declined to comment.
Whether or not thanks to Elliott, PayPal is pledging financial discipline and a retrenchment to its core brands for growth. Indeed, its latest earnings call was notable for what was missing: talk of becoming a financial-technology “super app.” Gone are the days when Schulman was rumored to be eyeing blockbuster deals like a $45 billion acquisition of
(PINS), another company that Elliott recently took a stake in. Also gone is talk of adding stocks or more cryptocurrencies, beyond
and a few others now on the Venmo and PayPal apps.
“We have narrowed our focus,” Schulman told analysts, sounding humbler as he outlined plans for “profitable growth” and “cost discipline.” The company aims to refocus on its core: PayPal and Venmo digital wallets, online checkout, and its Braintree platform for merchants. He highlighted $900 million of cost savings for this year and $1.3 billion in 2023.
PayPal also dished out other positive news, including sequential gains in quarterly revenue growth and a bump in forecasts for adjusted earnings in 2022. A $15 billion share buyback program was announced, including plans to return more than 75% of free cash flow to investors. The company named Blake Jorgensen as its new chief financial officer, restoring some management stability after the prior CFO left for
(WMT) in April. Investors loved it all, bidding up the stock around 11% on the week.
Granted, cost cuts and share buybacks aren’t exactly catnip for growth investors. And the new strategy would be a big turnabout from PayPal’s storied past. A roster of tech industry all-stars—Peter Thiel, Max Levchin, and Elon Musk—brought the company to life. It went public in 2002, was quickly acquired by
(EBAY), and lived under that roof until 2014, when it was spun off. Schulman, 64, a former CEO of Priceline and Virgin Mobile USA, has run the show since then.
PayPal got a huge pandemic boost as e-commerce surged. Schulman and his team expanded into crypto, buy-now-pay-later, credit cards, and international services. Stock trading seemed like the next product, taking on Gen-Z-focused apps like
(HOOD). The company told investors in February 2021 that it aimed to hit 750 million active accounts in 2025 on a $50 billion revenue base, nearly doubling its sales haul from 2021. Free cash flow, the company said, could also double, hitting $10 billion annualized.
Yet cracks in that vision soon emerged as the pandemic’s e-commerce trends started to fade. The stock wobbled last fall on rumors of a deal for Pinterest, a sign interpreted by investors that PayPal couldn’t hit its growth targets organically. Those fears were validated in February, when PayPal backed off its 2025 goals and cut forecasts. Punishment was swift; the stock tanked more than 30% in two days. It kept drifting down through the summer, hitting lows around $77.
PayPal today looks less ambitious, though that may be one of the stronger arguments for the stock. The company is pledging to revive margins, which have fallen 10 percentage points from pandemic-era heights. “PayPal has a major cost management program underway to rein in expenses that sprawled during the pandemic,” says MoffettNathanson analyst Lisa Ellis. U.S. revenue, while trending down from the pandemic, was up 18% year over year. Lending and merchant services show strength.
The dance with Elliott looks like another positive catalyst. The company is reviewing its capital-allocation and balance-sheet plans—measures that Elliott requested. One wild card: a tie-up with Pinterest isn’t out of the question, given the activist’s involvement in both stocks.
Several analysts hiked price targets this week, including Morgan Stanley’s James Faucette, who sees the stock hitting $134, up some 36%. Skeptics remain, though. BTIG’s Mark Palmer reiterated a Neutral rating on the shares, noting that while he was encouraged by the cost cuts and buybacks, it sounds like a “mature company deploying a harvesting strategy,” rather than one reigniting growth. He sees the stock trading in a 15% range over the next year.
Indeed, a challenge for PayPal stock now is its investor base. Will it appeal to growth managers, value investors, or those who just want a stock capable of returning 10% to 15% a year, without much drama? Bulls say it’s nicely set up for the last scenario. “It’s not a superhigh growth stock, but it’s an amazing brand,” says D.A. Davidson analyst Chris Brendler. “The valuation has a long way to recover, and that’s the opportunity for investors.”
Write to Carleton English at [email protected]