Why activist hedge fund Elliott Management is targeting PayPal

Payments giant PayPal has finally attracted an activist.

PayPal had been a pandemic darling as households increasingly shopped online, but shares have fallen more than 60% this year as people returned to their pre-pandemic spending habits. Earlier this year, the company cut its earnings forecast for 2022, prompting the company’s worst one-day selloff in its history as a publicly traded company.

That steep decline over the past year, which saw PayPal go from a $350 billion company at its peak to one valued at about $89 billion, had investors wondering whether an activist would call the payment company’s door. Elliott Management, the $50 billion hedge fund, appears to have done just that, according to a report in The Wall Street Journal.

PayPal shares rose more than 7% in after-hours trading on July 26.

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PayPal and Elliott did not immediately respond to a request from Barron’s for comment outside regular business hours. The WSJ did not have details on the size of Elliott’s stake or his intentions for the company. However, it’s easy to see why an activist might target it.

PayPal’s stock is currently trading at about 19 times forward earnings, well below its five-year average of 36 times, according to FactSet data. Peers like Visa and Mastercard trade at 26 times earnings and 29 times, respectively. Closing that valuation gap, especially for a more growth-oriented company like PayPal, is something Elliott would likely push for.

As for how PayPal can get there, the company already acknowledged that it is focusing on its online payment offering and digital wallet. At an investor conference last month, CEO Dan Schulman said that 30% of its active accounts provide about 80% of the company’s total transactions.

“The more people we can get engaged with the service, the higher the average revenue per active account will be,” Schulman said at the time. “The bottom of the funnel is more important to us now than the top.”

Analysts have also argued for a more focused approach for PayPal. In light of Elliott’s stake in PayPal, Mizuho Securities analyst Dan Dolev reiterated his call that PayPal should focus more on its payment button and spend less time on other projects such as cryptocurrencies.

By spending less on research and development and sales and marketing, Dolev said PayPal could see margins improve by 10 percentage points.

Elliott may have other ideas for the company. Earlier this month it was reported that Elliott took a stake in Pinterest. Again, Elliott’s intentions for Pinterest are unknown, but that hasn’t stopped the speculation.

In a recent report, Thomas Champion, an analyst at Piper Sandler, said he could imagine Elliott pushing Pinterest to sell: Microsoft and PayPal had been rumored to be suitors.

PayPal will release its second quarter financial results on August 2.

Write to Carleton English at carleton.english@dowjones.com

This article was published by Barron’s, part of Dow Jones


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About the Author: Chaz Cutler

My name is Chasity. I love to follow the stock market and financial news!