PayPal's sudden $900 million cost cutting creates a huge new challenge

PayPal’s sudden $900 million cost cutting creates a huge new challenge

PayPal has only known a growth, growth, growth mindset under long-time CEO Dan Schulman.

That mindset officially ended as of August 2 as PayPal switches tactics to appease activist investor Elliott Management, which has disclosed a $2 billion stake in the payments giant.

Late Tuesday, the company outlined $900 million in cost cuts — mostly through layoffs, real estate consolidation, and project cutbacks. PayPal also uncorked a new $15 billion stock buyback plan.

Investors cheered the about face by PayPal on costs and the new stock buyback plan, and shares surged 9%. The company’s ticker page was the most visited on the Yahoo Finance platform.

“We think shares go higher given the significant changes being made by management, which we expect will positively impact 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; of the changes announced, cost savings were the big headline ($1.3 billion full run-rate in 2023) and the $15 billion share buyback is material.”

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

“Revenue growth matters,” one source told Yahoo Finance. “Otherwise PayPal looks like a mature company harvesting its customers and cutting costs… they can’t cut their way to growth.”

Other insiders tell Yahoo Finance that the several bad quarters preceding this pivot — and the 64% stock plunge in the past year — were fueled by misguided strategy and complacency inside the organization following years of winning.

“I have heard from some investors who were bearish like me that they thought [Paypal CEO Dan Schulman] was set to go,” SMBC analyst Andrew Bauch said on Yahoo Finance Live (video above). “I think given overhaul and changes that are likely under way for now, I think that he is probably going to lead them through the next several quarters. I could see a switch in the longer term, but quite frankly there were missteps that Dan took. And I think he did spread a lot of their resources too thin and kind of chased every shiny new object that came across in the fintech space. A lot of them didn’t come to fruition.”

A booth for Paypal-owned Venmo on display during the REVOLVE x The h.wood Group Present REVOLVE FESTIVAL at Merv Griffin Estate on April 17, 2022 in La Quinta, California. (Photo by Vivien Killilea/Getty Images for REVOLVE)

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

The cost-cutting tactics by PayPal comes in the wake of another challenging quarter for the business. Here is 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% vs. 18.7%

  • Activist Customer Accounts: 429 million vs. 433.1 million

  • Adjusted EPS: $0.93 vs. $0.86

  • Full Year Sales (ex-Ebay): +13.5% vs. +15% to +17% previously

  • Full Year Adjusted EPS: $3.87 to $3.97 vs. $3.81 to $3.93 previously

If PayPal can stay as focused as its newfound self appears to be, the stock may grow into that upbeat assessment provided by Cantwell and others like him on the Street.

But if corporate bloat, lack of focus, and slowness to execute on cost cuts continues, best believe PayPal bulls will be let down. Then Elliott and its team will be knocking on the C-suite doors of PayPal — and maybe pushing for new occupants in those offices.

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

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