The stock market is in the midst of something that Bananarama sang about back in 1983, namely a Cruel Summer. Winter and spring were pretty unkind as well, especially in the tech sector. One company that has been smacked around particularly hard is PayPal Holdings (Nasdaq: PYPL) which has been cut almost in half during 2022. Better times may be ahead for the payments company, however, due to several factors.
The company recently reported quarterly results that exceeded Wall Street’s expectations, with EPS of $0.93 which handily beat estimates, and revenues of $6.81 billion which was better than estimates by 10%. Domestic transaction results were strong, driven by Venmo but international revenues declined which may be of concern if the U.S. economy is indeed in recession. Another encouraging metric was the 6% increase in total active accounts, which now total 429 million.
Another recent development was the announcement that activist investor shop Elliott Management disclosed a $2 billion stake in PayPal. Look for Elliott to run the standard activist playbook of agitating for cost-cutting measures, which already appear to be underway. The company has announced expense management initiatives of $900 million for the rest of 2022 and $1.3 billion for 2023 in the form of layoffs and real estate consolidation. Cost cutting can be a nice short-term catalyst for stocks, but they need to be balanced by long-term growth initiatives since no matter how hard CEOs try, it is folly to try and cut your way to prosperity. Getting in bed with activist firms may provide a short-term bump, but it is something that investors should keep a close eye on, as firms’ interests may not always align perfectly with those of long-term holders.
Another nugget from the recent earnings release was the addition of $15 billion to the company’s buyback program. PayPal’s market cap is about $111 billion so the buybacks could put a serious dent in the company’s outstanding shares which would in theory bump the EPS up due to a lower denominator.
The macrotrend of e-commerce may also work in PayPal’s favor. The rising tide of the shift from brick and mortar to online as the default method of shopping might truly lift all boats. It’s difficult to foresee society at large shifting back to a physical shopping experience now that online shopping has become the first option for four generations: Baby Boomers, Gen X, Millennials, and Gen Z. A subset of this macro trend is the instant payment space, of which PayPal’s segment Venmo is the leader. So much so that the word Venmo has become a verb, and is a common solution for transferring money amongst individuals.
The market as a whole and the broader technology sector still may face some strong headwinds, but PayPal appears to be making all the right moves to turn the ship around. For long-term-minded investors, PayPal is one stock to take a deeper look into. If the company can continue growing active users and keep expenses in check, some serious upside could be on the horizon for investors.
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