PayPal Rebounds on Activist Intervention

Paypal Holdings (PYPL) surged +23% in Q3, the fifth-biggest quarterly gain in the Nasdaq 100 Stock Index ($IUXX) (QQQ).  Shares of Paypal surged after activist investor Elliot Investment Management LP said it took a $2 billion stake in PayPal in August.  Elliot Management has a history of taking large positions in companies to boost shareholder value. 

Evercore ISI said, “Elliot Management’s 2% ownership of PayPal and its collaborative approach with management support potential margin and earnings upside based on its precedent investments.”  With Paypal still down -54% this year, the stock’s valuation may have fallen far enough to attract value investors.  Paypal is priced at less than 19 times estimated earnings for the next year, down from an average of 32 over the past ten years.

Shares of Paypal rallied after Elliot Management persuaded the company’s board of directors to implement cost savings plans for the company.  Paypal said it will generate roughly $900 million in cost savings this year and expects to save as much as $1.3 billion next year as part of its broader plan to reduce expenses.  Paypal CEO Schulman said the company would also be looking to “identify additional areas of productivity improvements.”

Multiple quarters of slowing payments volume growth have weighed on the stock in the first half of this year, especially as a surge in inflation continues to put pressure on consumer spending habits.  However, analysts are predicting the worst may already be over for Paypal, with forecasts of total payment volumes increasing by about 14% in Q4, the first quarter of accelerating growth since Q1 of 2021.  Also, the announcement by Paypal in August of a new $15 billion share-repurchase program gave shares a boost.

Yet, not all analysts are confident in Paypal’s turnaround.  Susquehanna downgraded Paypal last month to neutral from positive, saying the company’s Braintree business will pressure margins. Susquehanna predicts that Paypal’s Braintree unit, which offers a payments service for websites and apps, could account for 72% of overall volume growth next year, eating onto Paypal’s margins due to its higher transaction costs.     

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