The appointment of Alex Chriss as the new CEO of PayPal was met with initial praise. However, the payment giant's stock took a hit when it was revealed that activist hedge fund Elliott Investment Management no longer owned shares in the company. Although Elliott had previously reported a $2 billion stake in PayPal, their recent holdings report showed zero shares. It remains unclear if they still have exposure to the stock through other means.
Investors reacted negatively to this news, causing PayPal's stock to drop 6% on Tuesday. Despite a small increase on Wednesday, the stock is still down 5.5% from Monday's closing price.
PayPal CEO Dan Schulman acknowledged the discussions with Elliott, describing them as "constructive and collaborative." He emphasized the company's focus on operational improvements, revenue-generating investments, and return of capital.
Mizuho analyst Dan Dolev, who maintains a "Buy" rating on the stock, commented on Elliott's impact, stating, "They came in to pursue change, and they definitely were able to force them to cut costs. However, the message is not great."
The market will now be watching closely to see how PayPal's newly appointed CEO, Alex Chriss, addresses this setback and leads the company forward.
PayPal Shares Struggle Amidst Fading Earnings
Since the earnings call in August 2022, PayPal shares have experienced a decline. On Wednesday, the stock traded at approximately $59.68, representing a 33% decrease from its closing price on Aug. 2 and an 80% drop from its pandemic-era highs in 2021.
Consumer Spending Patterns Impact PayPal
One of the contributing factors to PayPal's struggles lies in the rapid return of consumers to prepandemic spending patterns, which rely less heavily on online orders.
Additionally, the cost savings projected by Schulman, the CEO of PayPal, have not translated into the expected improvement in profit margins. In the second quarter, PayPal's operating margin fell by more than a percentage point to 21.4%, although it was still higher than the 19.1% recorded in the second quarter of the previous year. The growth of PayPal's "unbranded" checkout product for merchants, which has lower margins compared to its branded counterpart, has contributed to this decline.
Over the long term, PayPal faces tough competition from technology giants that have introduced their own checkout options. Apple Pay has become nearly ubiquitous in iPhone apps. Moreover, companies like Alphabet's Google and Amazon also offer their own checkout functions.
Analysts' Positive Outlook
Despite these challenges, analysts still have a positive outlook on PayPal. Out of 46 analysts, 31 rate the shares as "Buy" or "Overweight," with an average price target of $85.88, according to FactSet. Furthermore, the stock appears relatively inexpensive when compared to its historical performance, with a forward price/earnings ratio of 11 compared to its five-year average of 32.4.
However, while optimistic about the stock, Dolev, an analyst, does not anticipate any near-term catalyst that could lead to an expansion of its multiple. He suggests that PayPal will likely remain stagnant until the new CEO demonstrates a clear vision.