PayPal (PYPL) – Q4 and 2024 – January 5, 2024
I posted something very similar to this across my social media accounts this week. If you read it, this will sound familiar, but with a bit more detail.
There has been much excitement surrounding Alex Chriss and a new era of PayPal leadership. I think some of that excitement is warranted. He has a clear track record of driving profitable growth with very relevant offerings at Intuit. He spearheaded the small and medium business (SMB) segment that makes up the largest chunk of that firm. As we’ve covered extensively, SMB expansion for private label checkout is perhaps the most important margin lever that PayPal has to pull. His track record is quite fitting and the early changes he has made (like selling Happy Returns) show me that his head is in the right place.
But? The turnaround here will not be immediate. It will not resemble a late 2022 Meta Platforms. There is more to fix and longer time to value on the fixes. Meta is the exception to the rule (thank you Zuck). Paypal’s operation “Quantum Leap” will likely be more of a brisk walk. Faster innovation and retrofitting antiquated tech at giant scale do not happen overnight. Branded checkout needs to be even with the Shopify’s (Shop Pay) of the world. I already see that happening with slick, 2-click checkout on partner sites like United Airlines, but more work is needed.
Onboarding a few merchants to the latest checkout product per quarter is far too slow. Shopify can snap its fingers to onboard. PayPal must go faster… but how? Infrastructure needs to be strengthened so that PayPal can not only accelerate the integration of this latest flow… but guarantee that the next flow’s integration takes weeks, not years. Under Schulman, the firm had gotten to a point of finally wrapping up integration just in time for the latest version to go live. That does not work. This isn’t about making a few tweaks… it’s about rebuilding an entire foundation to ensure PayPal innovation can morph from a sloth to a jaguar in the years ahead. Again, that takes time.
Value add services on the Braintree side need to be rapidly introduced to bring that product up to speed with Adyen & Stripe. That’s the main priority under Quantum Leap; Chriss has direct experience and success in layering on related high margins services at Intuit. Rounding out Braintree’s offering with fraud, FX, and chargeback services is the only way it can compete on anything other than price. Yes, Braintree can be a compelling loss leader for driving better branded placement & share. But why not make it a profit leader with software add-ons? That’s the plan… & that plan will also take time. Chriss won’t chase unprofitable revenue or account growth like Schulman did.
So? All of this is to say that I don’t see excitement manifesting in rapid progress when it reports Q4 earnings. I see transaction margin again falling Q/Q & Wall Street fixating on that number. Temu cross-border & BNPL will both help, but they’re smaller pieces of the puzzle with branded share & private label margin expansion being the 2 keys. 2024 will have to be the year that PayPal sheds its impending dinosaur status & morphs back into the FinTech innovation titan it had once been.
Macro headwinds shifting to tailwinds will help mightily, but at the very least, it must maintain its branded checkout share or even grow it for this to work. This must happen while Braintree and Venmo margins expand. Without all of this, 2024 profit growth driven by cost cutting alone is not an enduring strategy. While there’s likely more to do on the cost cutting side (likely more layoffs, unfortunately), that can only bolster the bottom line for so long. Growth, growth, growth.
The potential is there. The CEO is now there. The talent has always been there (yet handcuffed by PayPal’s plumbing). The balance sheet to invest is there & then some. The metric leads within checkout give it a clear right to win. Its unmatched brand awareness & trust mean it doesn’t need to be better than the rest… up to par will do just fine. Paypal has been a case of leadership doing whatever it can to stand in the way of success. Alex Chriss is the man to get out of the way. He’s the leader to unleash this juggernaut representing well over $1T in annual volume. As we move further into 2024, I think that will be clear. If it doesn’t, that will likely mean my positive view of him is misplaced. For Q4 2023, I expect very, very little.
PayPal caught a couple downgrades this week on heightened executional uncertainty. This is extremely fair. There is a lot to prove. The stock responded positively to both downgrades to add credence to a “bad news bottom” scenario. The worst could likely be priced in.
Source: YCharts
