Stocks to sell

Shareholder Activism Won’t Fix the Key Issue With PayPal Stock

Macroeconomic headwinds continue to weigh on fintech stocks, and PayPal (NASDAQ:PYPL) is no exception. However, a recent development is helping to renew interest in this digital-first provider of payment solutions and other financial services. Activist hedge fund Elliott Investment Management is building a stake in PYPL stock.

Per news reports, Elliott’s plan is to push for a speedup in the company’s cost reduction efforts. On the surface, this sounds like a solid way to help boost the value of PayPal. Higher earnings in theory would result in the market being willing to assign the company a higher valuation.

While cost-cutting is a worthy goal, it’s something that fails to address the key issue with the company: slowing growth.

Until management, or an activist, comes up with a promising plan to get this company back into growth mode, further downside risk continues to outweigh upside.

PYPL Stock: Why Activism by Elliott May Fail

When it comes to activist shareholder demands, cost-cutting is one that’s common. If done right, cutting costs can help make a company more profitable. This in turn leads to a corresponding jump in share prices.

In the case of PYPL stock, however, it may have a less dramatic impact. At least, assuming that Elliott’s activism focuses more on the easier things to change about the company (its cost structure) rather than the more challenging ones (re-accelerating revenue growth).

Again, the key issue with PayPal is slowing revenue and earnings growth. Year-over-year revenue growth last quarter came in at just 9%. Despite this, the stock continues to trade at a premium (22x) to payment companies like Fiserv (NASDAQ:FISV). Fiserv trades for just 15.8x forward earnings.

PayPal could continue to deliver such lackluster numbers. As economic conditions indicate a tougher environment ahead, earnings (without cost cutting) may not bounce back in 2023. This hard-hit stock may fall to a lower forward multiple. Possibly, it could fall to an extent that outweighs the impact of decreased costs on EPS.

A De-Rating Could Outweigh Cost Cutting

As you may have inferred above, more disappointment could push PYPL stock to a valuation more in line with a name like FISV stock. In other words, something in the ballpark of 15.8x earnings.

If shares fall to this valuation while cost cuts are pursued? Said cuts will need to result in an earnings boost of at least 35.4%, just to get shares back to where they trade today. Achieving that may prove difficult. PayPal already has a cost-reduction program, with a goal of cutting $260 million per year in costs.

Elliott may have an idea of where further trimming could be done. Then again, possibly having a medium time horizon (1 or 2 years) with the stock, the activist fund may be okay with pursuing cuts that come at the cost of affecting future growth for PayPal.

The Verdict

Slashing costs may not be a cure-all for PayPal stock. Even if Elliott gets PayPal’s board and management to more aggressively cut costs, this may fail to result in a sustainable increase in its stock price.

Instead, growth could continue to slow down. That’s before accounting for the possible impact of an increasingly likely recession. After surging to around $82.50 per share on the activism news, shares could easily fall back to their 52-week low of $67.60 per share. Or worse, shares could hit new lows, if the stock gets de-rated to a valuation on par with its payments processing peers.

In short, news of Elliott Investment Management’s involvement does little to change my view on the stock. I continue to give it an F rating in my Portfolio Grader.

It’s debatable whether shareholder value will result in meaningful upside. Avoiding PYPL stock is still the best move.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.