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SMBC Nikko Securities America Senior Research Analyst Andrew Bauch joins Yahoo Finance Live to discuss second-quarter earnings for PayPal, activist investor Elliott Management’s stake, the company’s $15 billion share buyback program, cost-cutting measures, and the outlook for the company.
JULIA HYMAN: PayPal shares getting a boost today after the company announced an information sharing agreement with Elliott Management and a $15 billion share buyback program in its second quarter-- all of that as part of its second quarter earnings report. The payment platform also said it plans to cut costs by $900 million a year.
All of that seems to have convinced our next guest that things are not quite as bad as they were. That's SMBC Nikko Securities America senior research analyst Andrew Bauch. Andrew, thank you for being here.
You had been an underperform on the stock, I believe, since November. Now, you're going to a Neutral. Has Paypal seen the worst of it here? Have they turned a corner?
ANDREW BAUCH: Yeah, I don't know if things have actually turned the corner from the market share dynamics anyway. But I think that a lot of the numbers have de-risked to an extent that we feel a lot more comfortable, well, saying that being short at these levels is probably a little too risky for our liking.
I mean, particularly in a market where we believe that delivering on margin beats and delivering earnings is one of the key variables, which is what's going to make your stock go up, the company seems laser-focused on those initiatives and tightening their belts. And while we are still reluctant to upgrade this to a full-out Buy, we still see a lot of the value in Elliott coming in and stepping in, and then having some more focused leadership on delivering the things on this business that was what made them the leader for the last 5, 10 years being core checkout and focus on the digital wallet.
BRIAN SOZZI: Andrew, $900 million in cost cuts-- that's some serious money. Do you think that is going to cause a culture shock inside of Paypal to such an extent that might hurt the longer-term outlook for the business?
ANDREW BAUCH: Yeah. I mean, that's one of the reasons that we're hesitant to kind really go any more bullish than a Neutral. I mean, I think that you can kind of expect Paypal in, really, a slightly negative scenario, that they grow in line with e-commerce growth. Because over the last couple of quarters, they actually have been outpacing e-commerce growth from a branded share of checkout perspective, growing 14% in July, which is well above the industry average of around 10 or so, depending on how you slice it.
But we think that actually, the culture shock is probably likely underway internally at Paypal. I mean, they're closing up certain offices. We hear that they've really cut hiring to about flat, and repurposing a lot of people into-- from other unprofitable pieces of their business into other different segments, in order to get the most efficiency out of those engineers.
So look, I think that it's really challenging for us to get bullish about the five-year perspective. And we see that the days of Paypal growing in the 19%, 20% are likely behind us. But there is still a lot of optionality around what they can create in this business from a value perspective, be it by selling off certain assets or divesting the credit book that they have on balance sheet today, which, if you remember, they did this in 2018, albeit it was a much bigger piece of their balance sheet, and the stock nearly doubled in the months prior. So those are catalysts that if we were a short, we wouldn't feel too comfortable stepping in front of.
BRAD SMITH: What's all that mean for Venmo?
ANDREW BAUCH: I'm sorry?
BRIAN SOZZI: What does all this mean for Venmo? You describe the internal corporate culture, some of the resource changes as well. Venmo is still only representing about 20% of the total gross, or the total payment volume, I should say. So what does Paypal need to get right with that subsidiary in order for it to have a longer customer lifetime value with its end users?
ANDREW BAUCH: Yeah, Venmo has actually been somewhat of a disappointment for a lot of investors over the years. They've really struggled to drive monetization, as you mentioned. And it's lagged pretty considerably when you consider the progress that Cash App has made over that same time period, growing from $10 per monthly active users, upwards of $40 to $45. And Paypal-- or Venmo has considerably lagged that.
But there is a refocus on what Venmo can be. And quite frankly, it is one of the three preeminent digital wallets and P2P options for a lot of consumers in the space. I think what they're going to be doing is focusing in on the pay-with-Venmo opportunities-- specifically, the Venmo credit card, the Venmo debit card, and really pushing those. Because those are the things that can help you cross the paradigm from just an online commerce solution to somewhere that you use at the physical point of sale.
As a reminder, we also have, coming in the back half of this year, the adoption of Venmo on Amazon. And while we're reluctant to put too many big numbers in our model from that initiative alone, I mean, it should be a good catalyst for engagement and getting more users involved in the app.
And look, their demo still skews a lot younger than the likes of the Zelle, or other legacy payment solutions in the space. So they're fairly well set up from a longer-term aging of demographics perspective, and having a lot of those younger users start using Venmo as a much more holistic banking solution.
BRIAN SOZZI: You mentioned Eliott, and they're not going away, Andrew. They signed an information-sharing agreement with Paypal. Do you think a year from now, Dan Schulman is still leading this company as CEO?
ANDREW BAUCH: It's a really good question. And I've heard from some investors who are bearish like me, that they thought Dan was set to go. I think given the overhaul of changes that are likely underway for now, I think that he's probably going to lead them through the next several quarters.
I could see a switch in the longer term. But quite frankly, there were missteps that Dan took, and I think he did spread a lot of their resources to them and kind of chased every shiny new object that kind of came across in the fintech space, and a lot of them didn't come to fruition. So it remains to be seen.
But I think for the near term, I think Dan is probably safe. And Elliot will have a lot of influence in the strategic direction of this company. I think in that sense, it's not immediately urgent that you need to make a CEO change in that regard.
BRAD SMITH: Andrew, thanks so much for the time breaking down PYPL. We're going to continue to track the shares as we go on throughout the rest of the day.