Stock Analysis & Ideas

PayPal: Streamlining Operations Could Pay Off, Says Analyst

Story Highlights

PayPal delivered mixed Q1 results. Considering the macro challenges this year, the company also lowered its FY22 guidance and is now laying off its employees. Do investors have reason to be bullish on the stock? Let’s take a closer look at these issues.

Shares of PayPal Holdings (NASDAQ: PYPL) were on an upward trajectory on Thursday, climbing 7.1% to close at $88.32. However, this closing price is still far off from its 52-week high of $310.16. The rise in the stock comes even as the company is laying off its employees.

According to a Bloomberg report from last week, citing unknown sources, the digital payments company laid off many employees who worked in the risk management and operations business in Chicago, Omaha, Nebraska, and Chandler, Arizona.

The report also cited one of PayPal’s filings stating that the company also laid off “more than 80 people in its headquarters in San Jose, California.”

At the end of Q1, PYPL incurred $20 million in restructuring charges in relation to “the reduction of redundant operations and simplifying our organizational structure.” The company stated in its quarterly filing that its strategic move of streamlining its operations would result in another $100 million of restructuring charges over the rest of this year.

PYPL expects a reduction in “annualized employee-related costs associated with the impacted workforce” of around $260 million, “including approximately $90 million in stock-based  compensation.”

These layoffs come after the payments company delivered a mixed bag of Q1 results. But it was the company’s lowered FY22 outlook, citing macro challenges, that has left investors worried.

Considering the restructuring moves and the macro challenges, will PYPL continue to sustain its upward trajectory?

Mizuho Securities analyst Dan Dolev seems to support the company’s recent attempts to reduce its costs. According to the analyst’s financial model, PYPL could expand its GAAP margin by more than 1000 basis points if it managed to reduce its operating costs and focused on its core checkout business.

Paypal enables merchants to offer a digital checkout “online and in-store across all platforms and devices and to securely and simply receive payments from their customers.”

Dolev’s proprietary model indicates that core checkout jumped between 25% and 30% in 2021, “well ahead of AMZN’s retail business.”

Considering this growth in core checkout, the analyst would prefer PYPL to focus on this business, which could lead to higher core checkout take rates. What’s more, Dolev estimates that being laser-focused on core checkout could also lead to transaction payment volumes (TPV) in the “high-teens” over the medium term and sales growing at a compounded annual growth rate (CAGR) in “double-digit.”

Dolev also conducted a detailed analysis of PYPL’s operating expenditure. This analysis indicated that PYPL “may be spending too much money on sales & marketing and research & development.”

By the analyst’s calculations, if PYPL refocuses on “core checkout and lowering S&M [sales and marketing] and R&D [research and development] spend could drive more than 1,000bps points of GAAP operating margin expansion, from an estimated ~30% in 2021 (using revenue less transaction costs) to more than ~40% by 2026.”

As a result, Dolev remains bullish on the stock with a Buy rating and a price target of $120 on the stock, implying an upside potential of 37.9% at current levels.

The rest of the analysts on the Street agrees with Dolev and remains optimistic about PYPL with a Strong Buy consensus rating based on 26 Buys, five Holds, and one Sell. The average PYPL price target of $127.07 implies an upside potential of 43.9% at current levels.

Bottom Line

Given the macro challenges and PYPL’s efforts to streamline its operations, it remains to be seen how 2022 plays out for PYPL. However, it appears that both investors and Wall Street analysts are upbeat about this company.

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