Crypto: PayPal’s ambitions could be crushed by a powerful player
PayPal’s crypto offering could face its final days if activist hedge fund Elliott Management has its say.
The hedge fund recently took a stake in the beleaguered payment scrambler, according to the Wall Street Journal. The stake amount and what Elliott paid were not disclosed.
Elliott may encourage PayPal to eliminate its crypto offering that launched in 2021.
One reason Elliott was attracted to the payments company is that it has $8 billion in cash and short-term investments.
Activist investors often want the management of companies to be more aggressive in how they distribute a cash reserve.
The hedge fund may liquidate one of the five largest shareholders in PayPal, according to a Bloomberg report.
PayPal launched its crypto platform in early 2021, allowing people to invest in bitcoin, ethereum, litecoin and bitcoin cash. Consumer payment app Venmo also launched the ability to own crypto in April 2021.
Instead of spending time on cryptocurrencies, PayPal should focus on its core offering of providing payment transactions that are profitable, said Dan Dolev, an analyst at Mizuho Securities.
Following this strategy could give the company a margin improvement of 10 percentage points because money would not have to be spent on sales, marketing and research and development as PayPal works to create a “super app”.
PayPal spent about 16% of its revenue on sales and marketing in 2021 compared to its payment competitors who only allocated mid-to-high single digits, Dolev wrote in a research report. PayPal’s R&D is also higher at 20% of revenue, compared to payment companies that disclose the amount.
Wolfe Research’s Darrin Peller said Elliott could see this as an opportunity to pressure PayPal to lower expenses and increase share buybacks.
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The payments company has “room for further cost efficiencies” since sales and marketing costs rose by about 75% from 2019 to 2021, he wrote.
“Our checks indicate that PYPL’s marketing costs and mergers and acquisitions [merger and acquisition] integration costs can be more effective, Peller said.
In March, PayPal changed how it charged people to own the virtual currencies. Transactions that are $200 or less pay a minimum fee instead of the previous percentage cut.
The Fall of PayPal
The payment boom increased during the global pandemic as consumers spent their money on items they could buy online. The investors reaped the rewards.
As the pandemic has eased, people have embraced traveling and spending more time at concerts and sporting events. PayPal shares fell 60% after it cut its 2022 earnings forecast.
In April, PayPal reported that it added 2.4 million net new active accounts during the first quarter.
Shares in PayPal fell again last October when news emerged that the company was considering buying Pinterest, a social media company.
Elliott’s other efforts
In July, it was reported that Elliott Management had acquired a stake of more than 9% in Pinterest.
The hedge fund managed $50 billion at the end of 2021 and is known to be an active hedge fund investor, running campaigns in companies including AT&T Inc. and Twitter Inc.
PayPal’s recent troubles put the company in the penalty box and are not a stock pick, Wells Fargo analysts said in May.
“PYPL remains in the midst of a few company-specific headwinds in the near term (management transition, lowering 2022 guidance and execution).”
PayPal reports earnings on August 2.
