Elliott Management invests $100 million in PayPal Stock
PayPal was a major beneficiary of the COVID-19 pandemic. PayPal saw millions of transactions and e-commerce skyrocket during the pandemic. PayPal’s active account growth increased by 124M from Q4’19 through Q2’22. However, PayPal’s net account growth is slowing, which has resulted in a decrease in company guidance.
PayPal ended the second quarter with 429M active PayPal accounts. This is only 0.4M more active accounts that it had in its first quarter. The important active accounts report from PayPal saw a 6% decrease in growth year-over year. This was the sixth consecutive quarter of slowing growth. Due to the decrease in active accounts growth, PayPal’s net revenue growth fell to 9% in Q2’22.
PayPal Stock Q2’22 Active Account Growth
The fact that digital payments volume isn’t as high in 2019 due to the pandemic, PayPal’s business growth has slowed. PayPal does have one advantage, which likely attracted Elliott Management to its $2.0B investment in financial services company. The large PayPal payment network provides a steady, strong and free cash flow that allows it to continue its growth. With its 429M accounts, PayPal is the most trusted fintech for online payments.
PayPal’s cash flow generation is strong despite slower active account growth. Last year, the firm generated $5.2B in free cash flow and $1.3B each quarter. The firm’s free cashflow margin in the last year was 20%. PayPal stated that it anticipates FCF of at least $5B for FY 2022.
|Free Cash Flow ($M).||$1,059||$1,286||$1,550||$1,051||$1,291||22%|
|FCF Margin||17%||21%||22%||16%||19%||2 PP|
Why Stock Buybacks are a Valid Possibility for Companies
Elliott Management is known as a hard-charging activist investor. They push for stock buybacks and divestitures in order to unlock value. PayPal has already proposed cost-savings of $900M. There could be more.
PayPal announced an already announced $15B stock buyback. Elliott Management’s pressure was probably responsible for this purchase back. But I think this stock buyback plan is going to be substantially increased in the near future. PayPal’s current free cash flow is $1.3B per quarter. This could allow it to announce a $25B stock purchase back. This would give PayPal approximately five years of free cash flow, without any debt or cost reductions.
PayPal already purchases stock. If PayPal stock performs poorly, Elliott may push for additional buybacks. PayPal bought stock worth $2.3B in the first six months of FY 2022 and $2.0B every year between FY 2016 and FY 2021.
PayPal shares are now down 70% from their peak. This makes it an ideal time to buy back tons of discounted shares. This is something Elliott Management and PayPal know about. I believe a larger stock purchase back program will be announced in the coming months.
PayPal will produce non-GAAP earnings per Share of $3.87-3.97 for FY 2022. This would indicate a P/E ratio of 23.2 X. Based on the expected EPS of $4.79 next year, the stock trades at an earnings multiplier factor 190.0 X. This is significantly less than the 33.8X average P/E ratio last year.
At the moment, the biggest commercial risk to PayPal is the possibility that active account growth will drop into negative territory. This could pose a grave problem for the stock. The active account growth of PayPal slowed significantly in FY 2022. It could get worse before it gets better. The FY 2022 revenue guidance (1% increase) is not encouraging. Growth could slow further if the macro picture gets worse. Shares could fall if key platform metrics drop, even though activist investors are present.
I am looking forward to PayPal’s announcement about an increase in stock purchase backs. PayPal shares trade at a attractive P-E ratio which indicates an increase in stock buybacks. PayPal’s cash flow is large and the estimated cost savings of $900M could easily finance an increase in stock purchase backs. PayPal’s track record of pushing for change, cost savings, and stock buybacks means it is a powerful catalyst. This could result in a higher revaluation for its shares.