PayPal - payments & activist investors in focus

Stock Of The Week: PayPal

Payments & Activist Investors In Focus

Although we’re going to focus on one company, it’s worth noting that another big earnings week awaits. 152 of the companies in the S&P 500 will report earnings and forward guidance over the next five days.

So far, the results of this earnings period have been broadly well-received by the market. 56% of the index has reported, and FactSet real-time tracking shows that the earnings growth rate has slowed to approximately 6% for the quarter. They note that:

“If 6.0% is the actual growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since Q4 2020 (4.0%).”

The slower rate is driven by hard comparisons to the unusually high growth in 2021, and a tougher macro environment.

While some companies are only now starting to note the impact of a slowing economy, PayPal has been struggling for the past year. The company is due to report earnings on Tuesday with the stock off the lows, but still a long way down from the peak just over a year ago…

PayPal shares lost just over 78% of their value from peak to trough. The Q4 2021 earnings report, published in early February 2022 was when markets really stuck the boot in, driving shares down by 25% on the day and wiping $50 billion in market value.

Weak earnings guidance was the main culprit, with the company citing the impact of higher inflation on consumer spending and supply chain issues. The impact of eBay launching their own competing payment service (obliging eBay sellers to move away from PayPal) was also noted.

Fast forward to Q1 2022, the firm posted better than expected revenue and user growth while lowering their full year profit per share outlook to between $3.81 and $3.93, below the previous forecast of $4.60 to $4.75.

Chief Executive Officer Dan Schulman acknowledged the underperformance, saying

"our shareholders expect more from us than our track record over the past several quarters."

He also added that

"forecasting normalized consumer ecommerce spending as we come out of the pandemic is exceedingly complex."

Caught in the headlights, PayPal has been slow to cut costs in an attempt to improve profitability.

Enter the activist

At the end of July, the Wall Street Journal reported that Elliott Management had taken a stake in Paypal. The size of the stake and their intentions are not publicly known, although their reputation might precede them…

The firm is well-known for their activist endeavours, acquiring stakes in companies and pushing for (sometimes tough) measures to improve profitability.

In the case of PayPal, Elliott may have seen that PayPal was trading at approximately 19 times forward earnings. Compared to payment rivals such as Visa and Mastercard which trade at 26 and 29 times earnings, is there potential to re-engage the 429 million active users while simultaneously cutting costs to close that ‘valuation gap’?

That will be one of the key questions for the report and subsequent earnings call on Tuesday, and the answers could be a big driver for the share price in coming weeks and months.