PayPal’s Sudden $900M Cost Cut Creates Huge New Challenge

PayPal has only known a grow, grow, and grow mindset under longtime CEO Dan Schulman.

That mood officially came to an end on August 2 as PayPal changed tack to appease activist investor Elliott Management, which disclosed a $2 billion stake in the payments giant.

Late Tuesday, the company announced cost reductions of $900 million, mostly through layoffs, real estate consolidations and project curtailments. PayPal also unleashed a new $15 billion share buyback plan.

Investors applauded PayPal’s about-face on costs and the new share buyback plan, and shares jumped 9%. The company’s ticker page was the most visited on the Yahoo Finance platform.

“We believe the stock is rising given the significant changes made by management, which we believe will have a positive impact on PayPal going forward,” Wells Fargo analyst Jeff Cantwell said in a note to clients. “2023 now looks much stronger after a number of strategic announcements from management; among the changes announced, cost savings was the headline ($1.3 billion full rate in 2023) and the $15 billion share buyback is significant.”

At the same time, however, other observers worry that PayPal’s cost cuts are so deep that long-term revenue growth could be threatened, creating a huge challenge for the company.

“Revenue growth is significant,” a source told Yahoo Finance. “Otherwise, PayPal looks like a mature company harvesting customers and cutting costs…it can’t carve its way to growth.”

Other insiders tell Yahoo Finance that the several bad quarters leading up to this pivot — and the stock’s 64% plunge over the past year — were fueled by misguided strategy and complacency within the organization after years of victory.

“I’ve heard bearish investors like me say they think [Paypal CEO Dan Schulman] was about to go,” SMBC analyst Andrew Bauch said on Yahoo Finance Live (video above). thinks he’ll probably lead them over the next few quarters. . I could see a longer term change, but frankly, Dan made some missteps. And I think he over-scattered a lot of their resources and kind of chased every new shiny thing that popped up in the fintech space. A lot of them didn’t work out.”

The story continues

PayPal declined to make CEO Dan Schulman available to Yahoo Finance for an interview, citing “investor meetings.” Elliott declined to comment beyond his statement from partner Jesse Cohn on PayPal’s earnings report on Tuesday night.

PayPal’s cost-cutting tactic follows another tough quarter for the company. Here’s how PayPal performed in the second quarter compared to Wall Street estimates:

• Net sales: $6.81 billion vs. $6.78 billion

• Operating margin: 19.1% versus 18.7%

• Activist customer accounts: 429 million against 433.1 million

• Adjusted EPS: $0.93 versus $0.86

• Sales for the full year (ex-Ebay): +13.5% vs. +15% to +17% previously

• Adjusted EPS for the full year: $3.87 to $3.97 vs $3.81 to $3.93 previously

If PayPal can stay as focused as its new self appears to be, the stock could get that bullish assessment provided by Cantwell and others like him on the street.

But if the corporate bloat, lack of focus and slow execution of cost cuts continues, it’s best to believe PayPal’s bulls will be dropped. Next, Elliott and his team will be knocking on the doors of PayPal’s C-suite — and possibly lobbying for new occupants in those offices.

Brian Sozzi is editor-in-chief and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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