PayPal's surprising $900 million cost cut creates a huge new challenge

PayPal’s surprising $900 million cost cut creates a huge new challenge

PayPal has only known the growth, growth, and growth mindset under longtime CEO Dan Schulman.

This mentality officially ended as of August 2 as PayPal switched tactics to please activist investor Elliott Management, who revealed a $2 billion stake in the payments giant.

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

Investors cheered PayPal’s face on costs and a new share buyback plan, and shares rose 9%. The company index page was the most visited on the Yahoo Finance platform.

“We believe the stock is up due to significant management changes that 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; among the announced changes, cost savings were the headline ($1.3 billion full run rate in 2023) and $15 billion stock buybacks are substantial.”

However, at the same time, other observers worry that PayPal’s cost cuts are so deep that long-term revenue growth may be at risk, creating a major challenge for the company.

“Revenue growth is significant,” one source told Yahoo Finance. “Otherwise PayPal looks like a mature company that harvests its customers and cuts costs… they can’t find their way to growth.”

Other Yahoo Finance insiders say the many bad quarters that preceded that pivot — and stocks plunged 64% in the past year — were driven by misguided strategy and complacency within the organization after years of winning.

“I’ve heard from some investors who have been bearish like me that they thought so [Paypal CEO Dan Schulman] “It’s about to take off,” said Andrew Bausch, SMBC analyst at Yahoo Finance Live (video above). I think given the reform and the changes that are likely underway at the moment, I think it will probably lead them through the next several seasons. I could see a shift in the long run, but honestly there were missteps Dan took. And I think it deployed a lot of their resources very sparingly and kind of chased after every bright new being that’s popped up in the fintech space. Many of them did not pay off.”

A booth for Paypal-owned Venmo is displayed during 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 Yahoo Finance CEO Dan Schulman available for an interview, citing “investor meetings.” Elliott declined to comment other than her statement from her rain industry partner Jesse Cohn on PayPal’s earnings report late Tuesday.

PayPal’s cost-cutting tactics come on the heels of another challenging quarter for the business. Here’s how PayPal performed in the second quarter compared to Wall Street estimates:

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

  • Operating margin: 19.1% vs. 18.7%

  • Active 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

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

If PayPal can keep its focus as it seems, the stock could grow to this upbeat assessment given by Cantwell and others like him on the street.

But if companies continue to be bloated, lack focus, and slow to implement cost cuts, it’s best to believe that PayPal’s bulls are going to be let down. Then Elliott and his team will be knocking on PayPal’s C-suite doors — and possibly paying to get new occupants into those offices.

Brian Suzy It is a comprehensive editor and Announcer at Yahoo Finance. Follow Suzy on Twitter Tweet embed and on LinkedIn.

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