The payments processor, PayPal, recently made headlines as activist investor Elliot Management announced a significant stake in the company1, coinciding with investors unpacking its solid Q2 earnings report2.
The company had a rollercoaster ride this year, with its shares losing almost two thirds3 of its value in the past year after peaking as a result of the digital payments adoption spurred by COVID-19. Although its shares slumped, the company has been making some major changes lately to remain competitive, PayPal's management team had to change gears, allowing them to beat analyst estimates.
Earnings
PayPal announced its second-quarter earnings on Tuesday 02 August 2022 after market close, reporting that adjusted earnings beat analyst expectations and that the company had appointed a new CFO and authorized a $15 billion share buyback2. News of the announcement caused its shares to rise 11% in after-market hours on Tuesday4.
Net revenue grew 9% year over year to $6.81 billion, exceeding analysts' expectations for $6.79 billion and up 10%, excluding foreign currency rates. Revenue, excluding the transition away from eBay, climbed 14%, resulting in adjusted earnings per share (EPS) of $0.93, exceeding expectations of $0.86 and up from $1.15 in the prior period2. The company, however, reported a net loss of $341 million for the quarter, compared with a profit of $1.18 billion in the same period last year.
At the end of the quarter, PayPal had added roughly 400,000 net new active accounts, bringing its total to 429 million active accounts, a 6% increase2.
In terms of its future, it emphasized its strides in identifying opportunities for efficiency and growth. As a result, its FY '22 financial outlook incorporates savings of $900 million in operating expenses and an additional $1.3 billion in savings from cuts and other changes2.
Management & Shareholders Enhancements
That's not all. Also helping boost PayPal stock on Wednesday was the company's announcement on a new $15 billion share buyback program, four years after launching a previously-announced $10 billion program. The company's share buyback program represents about 15% of its current market cap of $100 billion, with stock repurchases expected to be $4 billion in 2022 and the rest spilling over into 2023 and beyond2.
In addition to reporting strong financial results and securing a new repurchase authorization, PayPal announced management changes. Effective immediately, Blake Jorgenson became the new CFO, replacing John Rainey, who left the digital payments giant earlier this year for Walmart. The company also declared it was looking to hire a new CPO to replace retired Mark Britto2.
Elliott Management gets Active
Activist investor Elliott Management has been making some big moves lately, first buying 9% of Pinterest5 and now acquiring a large stake in PayPal. After weeks of rumors, PayPal announced Elliott Management had taken a $2 billion stake in the company. Both entities have entered into an information-sharing agreement with the mutual goal of maximizing the value of the company. The companies will also work toward profitability and increased return on investments.
According to the Wall Street Journal, that was the first to uncover Elliott Management's intentions, before its official announcement – PayPal is a very attractive target for acquisition, with a market value of about $89 billion even after its share price declined. The company has roughly $8 billion in cash and short-term investments, with very little debt. Activists often point to companies with large cash positions as targets for takeovers because they believe the companies could be investing more aggressively6. Elliott has had its best returns on investments by buying companies, fixing them and selling them. However, with a market capitalization of $99 billion, PayPal is unlikely to explore this option. Instead, it would implement strategic alternatives around Venmo or Braintree or acquire other companies that would have synergies with its core business7. However, PayPal and Elliott only described the goal of their agreement, not the specifics. We will have to wait and see what happens.
PayPal has taken several steps to streamline its operations, reignite growth, and accelerate cost-cutting. In response to the current environment, the company focused on increasing the engagement of its existing users rather than acquiring new, lower-yielding users. Furthermore, its management team has taken many steps necessary to achieve these goals, and its efforts are starting to show some positive results. Although PayPal has had a recent run of good news, investors should conduct their own research to weigh the pros and cons of PayPal stock before investment.
1 https://www.wsj.com/articles/activist-elliott-management-holds-stake-in-paypal-11658877844
2 https://s201.q4cdn.com/983461986/files/doc_financials/2022/q2/Q2-22-PayPal-Earnings-Release.pdf
3 https://investorplace.com/2022/04/pypl-stock-paypal-is-a-solid-buy-but-only-for-the-long-run/
4 https://seekingalpha.com/article/4529024-paypal-the-rebound-is-finally-here
5 https://www.wsj.com/articles/elliott-sets-sights-on-pinterest-11657828800
6 https://www.wsj.com/articles/activist-elliott-management-holds-stake-in-paypal-11658877844
7 https://www.cnbc.com/2022/07/30/activist-elliott-snaps-up-an-interest-in-paypal-this-is-what-could-be-next-for-the-payments-giant.html
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