Alex Kress, CEO of PayPal Inc.
Courtesy: PayPal
In January, after about a hundred days of work PayPal The payments company hasn't had much to celebrate in recent years, CEO Alex Kress told CNBC's David Faber. But Chris confidently said he was ready to “shock the world.”
“I like being an underdog,” Chris said in an interview with “Squawk on the Street” from the floor of the New York Stock Exchange. He was responding to a question about the recent wave of analyst downgrades.
Dan Dolev of Mizuho Securities was among the skeptics. He downgraded his rating to the equivalent of a comment on January 16, the day before Chris appeared on CNBC, with the headline of his report, “PayPal faces competitive pressures from 'A' to 'Z'.” apple Pay and Z represent payments app Zelle, a money transfer service jointly owned by seven of the largest U.S. banks.
A few weeks later, PayPal issued weak guidance in its fourth-quarter earnings report, sending the stock down 11% and justifying Dolev's concerns.
It looks like PayPal is in big trouble. Its market value has fallen more than 80% since its peak in mid-2021. The company had just cut 9% of its workforce, about 2,500 jobs, and was mired in single-digit growth. Analysts across Wall Street have seen competition rise and the take rate, or percentage of revenue PayPal keeps from each transaction, fall.
Fast forward to today, and the picture has gotten dramatically brighter for the 26-year-old Silicon Valley company and its 47-year-old CEO.
Chris marked his first anniversary at the helm on Friday. In the third quarter, which ended Monday, PayPal shares jumped 34%, their biggest quarterly rise since mid-2020, when the early days of the Covid pandemic fueled a boom in online shopping. It was the first time in eight quarters that PayPal outperformed the Nasdaq, which was up just 2.6% in the past three months.
Dolev boosted his rating back to buy in May. In July, the company raised its full-year earnings forecast for the second time and increased share buybacks. The company now “operates from a position of strength,” Chris said in the earnings release. The stock rose nearly 9%, its best day since late 2022.
“I think it's been nothing but a tremendous success story so far,” Dolev said. “The news flow has been amazing and out of this world, in terms of the way they manage expectations.”
Susquehanna's James Friedman raised his rating on PayPal to buy in early July. He said Chris was “raising the bar high” with his comments on CNBC, but said he was keeping his bold promise to shareholders.
“Do you know how he shocked the world?” Friedman said. “He really beat his numbers.”
Much of Chris's early success was linked to improving transaction margins and better monetization from major acquisitions such as Braintree, which he uses dead To process credit cards, the payments app Venmo, which is becoming more popular among businesses.
Having trimmed a lot of fat from the organization and with a renewed focus on profitability, Chris is finally generating some excitement on Wall Street after replacing Dan Schulman, who retired after nearly a decade as CEO.
“It's time for some new blood at PayPal,” said Dana Stalder, a startup investor at venture firm Matrix Partners who served as PayPal's chief commercial officer from 2004 to 2008. that”. “The focus has increased dramatically on the consumer, which is the right thing.”
“Wholesale changes” in leadership
Now comes the hard part: reigniting growth.
Analysts expect revenue growth of about 6% when PayPal reports third-quarter results in about a month, according to LSEG. For the fourth quarter, they expect growth of 5.5%. Sales are expected to become only marginally stronger in 2024, with analysts expecting growth of less than 8% for the full year.
PayPal did not make Chris available for an interview for this story.
On a July earnings call, Chris said of the company's next steps that “although change takes time and we still have a lot of work ahead of us, we are in a good position today, have the right leadership in place and are moving full steam ahead.”
Chris, who spent 19 years at the tax software provider Intuit Before joining PayPal, it took him only a little time to start overhauling the management team. In November, he brought Isabel Cruz from Walmart As chief people officers, Michelle Gilles from Intuit to manage its new small business and financial services group, Diego Scotti from Verizon to oversee the consumer group as well as marketing and communications, and Jamie Miller from EY as CFO.
“He has, from what I can tell, delivered the vast majority of the leadership team,” Stalder said. “It was wholesale changes.”
Early in his tenure, Chris publicly identified some of the reasons, in his view, why PayPal was struggling to find its footing. He highlighted the overly aggressive expansion strategy through deal making.
“We've done a lot of acquisitions over the last few years, and we've lost focus,” Chris said in an interview with Faber in January. “It was one of the things I noticed when I came 100 days ago.”
Chris added that the company has narrowed its priorities to five key things, “all focused on profitable growth.”
The most important metric to fix is transaction margin dollars, which is how a company measures the profitability of its core business, he said. Among Chriss' strategies to address margin decline is to offer increased value-added services to merchants, such as connecting two data points at checkout to reduce the shopping cart abandonment rate.
He said in January that 35 million merchants use PayPal and “when we improve their conversion rate, it improves their business, it improves our bottom line.”
PayPal noted to shareholders in its latest earnings report that its branded payments operation, along with Braintree and Venmo, helped the company achieve its highest growth in dollar transaction margin since 2021. Total transaction dollar margin increased 8% to $3.6 billion.
Susquehanna's Friedman says working at Intuit is the perfect training ground for learning how to structure a stock redemption process. Talking to executives there is like “talking to a dashboard,” he said.
“The source code for designing higher inventory is profitability,” Friedman said. He added that Chris “brings his management style down to the important things” and “minimizing the irrelevant”.
With Venmo, the goal is to transform one of the most popular options for transferring money from a strictly consumer app, which has no transaction fees, into a product for merchants. DoorDash, Starbucks Ticketmaster is among the companies that now accept Venmo as one of the ways consumers can pay.
Singing at the gas pump
Getting competitive at the point of sale is another big priority. This led PayPal to Will Ferrell.
The company launched a national campaign last month for PayPal Everywhere, offering 5% cash back for using a PayPal debit card within the mobile app. Ferrell, a pitchman, can be seen in a commercial using the PayPal app to buy lemonade and gas, while singing a parody of Fleetwood Mac's “Everywhere.”
Stalder says PayPal lags far behind Apple and… Googlewhich has the dominant smartphone operating systems with its built-in digital wallets.
“PayPal was discontinued because it was less convenient than mobile wallets, number one,” Stalder said. “The second thing is, it didn’t work offline.”
But Stalder sees real opportunity for PayPal, in part because Apple has just opened up the Secure Element on iOS so other developers can more easily use the phone for contactless payments, putting them on a more equal level with Apple Pay.
This development allows PayPal to “leverage the mobile wallet for the first time and make some real progress in offline payments,” Stalder said.
PayPal's other point-of-sale effort is called Fastlane, a one-click payment option for online sales that could go head-to-head with Apple Pay and Shop Pay by. Shopify. In August, the fintech platform Aden Fastlane has been made available to businesses in the US, and said it plans to expand the offering globally in the future.
Chris told investors on the earnings call that the company is urgently scrambling to meet the holiday rush.
“We need to make it available on as many platforms as possible so small businesses in particular can just have one click of a button and get it up and running over the holidays,” Chris said. “We are working with many of our larger organizations that want to get access to this before the holidays as well.”
“No drama”
Chris's long history at Intuit has given him a deep understanding of the expanding SMB world. This experience could be crucial as PayPal targets small and medium businesses with its diverse payment and checkout options.
Going down to market level allows PayPal to command better economics because there is much more competition when going after companies, said Sanjay Sakharani, an analyst at KBW.
“To the extent that they can expand their reach there, I think that could be very profitable,” said Al-Sakrani, who has a buy rating on the stock.
Chris calls SMBs “an untapped opportunity for us,” adding on the earnings call that these companies don't want to “cobble together 17 different solutions.”
“Small businesses are fighting for every customer,” Chris said in July. “They have to be able to find customers. They have to be able to engage with customers, convert them, and then re-engage with them.”
Venture capitalist Oren Zeev saw Chris working with small businesses in another capacity. They served together on the board of directors for home design startup Houzz, whose clients include many architects and contractors.
“He clearly brings a lot to the table with his extensive experience in small businesses,” Zeev said. As a communicator, Zeev described Chris as “no drama” and “respected by everyone.”
Although it has quickly gained the respect of investors, who have lifted PayPal's market cap by more than $20 billion in the year since Chriss started, there is much more to be done.
The stock is still about 75% below its record high. Al-Sakrani says shareholders are “eagerly awaiting his multi-year forecast” rather than just “trying to fix some things that are broken.”
“There will be some pressure at some point, in the near future, to further define this,” Al-Sakrani said.
Chris, for his part, did not declare victory.
“Our teams are moving with urgency, excited about our innovation and focused on execution,” he said on the second-quarter earnings call. “We are still early in our transformation, and while we are pleased with the progress we have made in many areas, we know there is much more we can do, much faster.”
Watch: PayPal's Cryptocurrency Leader Allows Merchants to Buy and Sell Virtual Assets
