With the former PayPal CEO and President Dan Schulman stepping down and the company’s stock dropping more than 24% from a year ago, PayPal’s new leadership has a lot of ground to cover in 2024.
The payments sector flourished during the pandemic, causing the stocks in the space to rise. Companies like PayPal (PYPL), however, had trouble adjusting to post-pandemic consumer behavior despite the market rally in 2023.
Still, some analysts maintain that while the company has been going through a growth slowdown in the last two years, now is a good time to buy in.
Wedbush Securities Managing Director Moshe Katri and Macquarie Capital Senior Equity Research Analyst Paul Golding join Yahoo Finance Live to talk all things fintech in the new year.
“What PayPal has gone through in the past year and a half is really a symptom of pretty much every single fintech company in this universe,” Katri said. “You cannot exclusively rely on transaction fees in terms of revenue generation. You have to do more than that.”
The challenge for new PayPal CEO Alex Chriss is to build a robust line of services for both merchants and consumers on the platform, Katri maintains.
Along with reinvesting in consumer experience, Golding said that he is interested to see how new leadership is going to expand the platform among small and medium-sized businesses and growing the margins around businesses such as BrainTree.
To see the full Lead This Way episode: Dan Schulman: The CEO who made PayPal a household name, click here.
Video Transcript
JULIE HYMAN: And that new chapter is already underway for PayPal with new leader Alex Chriss at the helm as of September. The former Intuit executive has his work cut out for him in the new year. PayPal stock down more than 24% from a year ago. With more on the path ahead for the payment giant, let's turn now to Wedbush Securities Managing director, Moshe Katri, along with Paul Golding, Macquarie Capital senior equity research analyst.
And, Moshe, I want to start with you because, before we look forward, I want to look back a little bit, because Dan Schulman, you know, built the company for a long time into what it is now and what it could potentially become. What do you see as his legacy, especially given that the end of his tenure was-- did see a decline in the shares?
MOSHE KATRI: Well, happy new year.
JULIE HYMAN: And to you.
MOSHE KATRI: So a couple of things. I would say that Dan has really gone through some pretty tough hurdles anywhere from a prolonged headwinds from transitioning away from eBay to having to go through a normalization phase of e-commerce growth from very high pre-pandemic levels. And you know what, he did build a hell of a company that has a very strong two-sided platform, one servicing merchants. It's very sticky. And then the other one servicing roughly about 400 consumers, 400 million consumers. And that's also relatively sticky.
I'm just going to end this what I have to say with one sentence. And I think it's really important here. What Paypal's gone through in the past year and a half is really a symptom of pretty much every single fintech company in this universe. You cannot exclusively rely on transaction fees in terms of revenue generation. You have to do more than that. And this is really the challenge for the incoming CEO, building a very robust value-added services on both sides of the platform.
JOSH LIPTON: Paul, I want to bring you in here as well. And Moshe talked about the new CEO there. And there's a new man in charge, Alex Chriss, comes over from Intuit, Paul. And he's outlined some of his priorities. Already, he talks about customer experience. He talks about margin expansion, Paul. I just want to know, do you think he's outlining the right priorities in your opinion?
- Well, as you mentioned, the three key priorities that we highlighted from the prior earnings call were investing in the consumer experience, growing margin particularly around the unbranded Braintree product and transaction margin, and also emphasizing the SMB, the Small and Medium Business cohort, particularly through PPCP, the PayPal Complete Payments Platform, which is tailored to SMBs.
PAUL GOLDING: In terms of those priorities, we talk about this in our research, the user interface and customer experience, Dan Schulman invested in this over the course of his tenure. So we'll be curious to see what Alex Chriss comes in and does that reinvigorates this relative to what we've seen prior and what has been done consistently.
On transaction margin as was discussed prior in the segment, as unbranded volumes continue to outpace branded, this transaction margin headwind continues to be a tough hurdle to overcome in terms of seeing transaction margin momentum go to the upside and see expansion. So the volumes are good. But the transaction margin does see pressure from that.
And then lastly on the SMB front, we've seen SMB platforms focus on this cohort. We cover Block. Block has historically been very SMB focused. So this isn't necessarily revolutionary in our view as we've seen other platforms go after this cohort on software and services sell-through as well. So it'll be interesting to see how PayPal leverages its scale and recognition in the marketplace to maybe do more with these themes that have been worked through already to some extent.
JULIE HYMAN: And so, Moshe, are you confident that Alex Chriss can overcome some of those transaction fee challenges? Are you optimistic about his leadership now at PayPal?
MOSHE KATRI: And this is where his background could be pretty instrumental, given what he's done in his past life on the SMB space. So that's number one. And given the fact that you really have to build or rebuild an ecosystem of products and services servicing-- facing both the merchant side of the business and the consumers, and if he's able to do that, I think you you're going to have a pretty stable business that has a sticky model on both sides. And you should be able to, at least hypothetically, given the fact that you will be relying less on transaction volumes, you should be able to address the margin compression issue that they've had for about a year and a half now.
JOSH LIPTON: And, Paul, I also want to talk about competition in this space, because, obviously, PayPal has a lot of it. It's everyone from Apple to Shopify. What are-- in that fight, Paul, what are Paypal's competitive advantages as you see it?
PAUL GOLDING: Well, scale, the most recently reported 428 million actives. And they've got about 35 million merchant accounts, which is substantial scale relative to the competition. They also have something that while others have this as well, they don't necessarily have it at the same scale that PayPal has, which is a merchant side of the house and a consumer side of the house. And to marry those ecosystems as they have done for quite some time and continue to do with various discovery tools that merge those ecosystems and allow for retargeting and promotion, that all helps drive this ecosystem flywheel that can drive margin, drive inflows, and help boost their overall margin profile.
JULIE HYMAN: And, guys, before we go, I want to ask you both what your top picks in the sector are. We've been focusing on PayPal, obviously, with a little bit of talk about Block also. So, Moshe, I'll start with you. What's your top pick?
PAUL GOLDING: I'll give it to you in a second. I just want to add one more thing in terms of what's also unique for Paypal's merchants business, which is a conversion rate. Paypal's merchant platform is very stable and very sticky, given the fact that merchants that actually use the PayPal button have very high conversion rates. And that's why it's been so sticky.
We've been in general pretty defensive on the space. And for example, we like the networks, we like Visa. And then we also like some of the more legacy merchant processors. I would include their Pfizer, Global Payments, and then the last one is PayPal.
JULIE HYMAN: And what about you, Paul?
MOSHE KATRI: We're outperform on the space as well. We like the networks as well. But top pick, Block probably at this point, just given the inflection point here on cost-outs and what we might see in terms of overall trajectory of that margin expansion potential relative to a more mature platform like PayPal.
JOSH LIPTON: All right. Moshe, Paul, thank you, guys, both for joining today. Appreciate the time and the insight there.
