PayPal (NASDAQ:PYPL) recently announced that COO Bill Ready plans to step down from his role at the end of 2019, and the stock sold off on the news. In this Industry Focus: Financials clip, host Dylan Lewis and Fool.com contributor Matt Frankel, CFP discuss why Ready is such an important piece of the PayPal puzzle and how investors should digest this news.
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This video was recorded on June 24, 2019.
Dylan Lewis: We're going to be talking about PayPal, because we got news last week that COO Bill Ready will be leaving the company at the end of 2019. This was not news that investors were expecting.
Matt Frankel: No. It's never expected when a key executive like that, especially one in charge of something as high-growth as Venmo, leaves. You've heard the expression, people like to abandon a sinking ship. This guy's abandoning a ship that's chugging ahead at full speed. That's why this catches investors off guard a little bit.
Lewis: I think that this move makes a little bit more sense when you understand how Ready got to PayPal, and maybe how he generally thinks about his career and his path in the corporate world. He was acqui-hired back in 2013 when PayPal bought his company, Braintree. He has largely been in charge of Venmo during that time. To me, he seems like he's someone who's a little bit of a serial entrepreneur, someone who likes to take on high-growth opportunities. The reason that the company gave for him leaving was that he was going to be doing just that. He is pursuing other entrepreneurial efforts. Certainly better than something bad coming out about him, and the company having to deal with that. But it is tough to lose someone who is so key to the efforts of maybe the highest-growth opportunity for them.
Frankel: Sure. I mean, PayPal is a tremendous machine right now. $16 billion in revenue over the past 12 months. $100 billion in payment volume, they're on track to do this year. Venmo is not a big, profitable machine yet. It's the highest-growth machine. It accounts for a lot of that $100 billion in payment volume. But they haven't really been able to monetize it yet. As we were talking about a little bit before the show, when you're going from something that's currently free to trying to monetize it, it's very touchy. There are a lot of products right now that are growing rapidly that people use because they're free.
Lewis: Yeah, I think it's very easy to throw a party and tell people to come over, they don't have to pay for beer or snacks or anything like that, we'll cover the cost of that! You just have a good time! It's a little tougher to get people to come to a bar where drinks are $10.
Frankel: Sure. That's the tricky part. It can be done. This is a trendier area than I live in, I'm sure you know of a lot of bars with a very expensive drinks that you can't even walk in. So it can be done. It's just a matter of figuring out the way to add value to consumers that make sense paying for. It can be a very touchy process with a lot of growing pains. So, when you lose a leader like this, who's owned this thing since day one, essentially, running Venmo, it throws a lot of uncertainty into the equation. Markets hate uncertainty, is the key thing to know when you see an executive leave and the stock takes a dive. This happened not that long ago with Square. CFO Sarah Friar decided to leave. She accepted a CEO role. Great for her. But she was really the rock star the company. She had been the public face of Square, emphasizing what they were going to do in the future, owning their future vision of becoming a one-stop financial institution for Americans. So when she left, the stock took a dive. It was about $100 when she announced her resignation. Now it's at about $70. It adds a lot of uncertainty. Is PayPal's business inherently worth less than it was before this announcement? No, absolutely not! But it brings up a lot of unanswered questions.
Lewis: Yeah. You look at his resume in his time at PayPal/Venmo, however you want to categorize it, pretty darn impressive. They've gotten this peer-to-peer payments platform to the point where they have 40 million users that are fairly active on there. And he has done quite a bit to position them well in the space. One of the big things that he really prioritized was getting some collaborative efforts out there with the credit card companies, and having something that was...we're not totally competition, we're not totally friends, we're in this frenemies space. I think there are a lot of people that maybe wouldn't have done that.
Frankel: Right, and integrating with a lot of these other free payment platforms. Just in the past few days, they announced [Alphabet's] Google Pay would start integrating PayPal. Someone else might have thought of that as a competitor and something to stay away from. But now Venmo's everywhere. I was one of the late adopters. I'm a little older.
Lewis: [laughs] I was a little earlier than you, but still a little bit on the tail end here.
Frankel: He's a millennial!
Lewis: So it's really my fault. Wait, you're not a millennial?
Frankel: I'm an older millennial. I'm a millennial by like three months.
Lewis: You and Brian Feroldi are both trying to separate yourself from the millennial tag. I think you're firmly millennials!
Frankel: We didn't grow up with technology, is the difference between older millennials.
Lewis: This is true.
Frankel: I didn't have my first cellphone until I was 19. That was common. I had a beeper in high school. You probably remember that from when you were 5.
Lewis: I've only ever seen them in ER and Scrubs. That actually queues up something interesting here with Ready. He was one of the younger members of the executive team as well. I think a lot of people were looking at the success that he's had and thought, "This might be the guy that runs this company down the road."
Frankel: Right. People don't want to see, especially with a product like Venmo, an old-school financial executive running this. That's why Jack Dorsey is such a highly regarded CEO. He's a younger guy. He's actually my age.
Lewis: There you go! You could be running Square!
Frankel: [laughs] I could! But people don't want to see an old-timey financial guy running something like this. They want the young, motivated guy who's growth-oriented, willing to grow at all costs, doesn't have traditional views of competition, like you were just mentioning. So the question is, what do they do now?
Lewis: Yeah. Matt, when you see all of this, and, and we saw how Square tried to navigate this with Sarah Friar, who was very similar to Bill Ready, do you look at this and say, "OK, they have to go out there and get somebody else"? Do you think that this is a situation where they hire internally? What do you think of that?
Frankel: In order to calm the market's fears, they need to hire someone who's either integral to Venmo right now, maybe his second-in-command or something; or someone who's been an absolute rock star in the financial industry. Hire Sarah Friar for the role, something to that effect.
Lewis: [laughs] "You know how you left this role that you're doing a great job in to take an executive role? Want to be a COO again?"
Frankel: Right. But someone who's had that kind of financial stardom in the space, if you will. They need to make a statement with whoever they have replace Ready.
Lewis: Yeah. That's a tough challenge.
Frankel: Big shoes to fill.
Lewis: Big shoes to fill. To your point, this is not something that dramatically changes the PayPal that we know right now. I think they are set for $300 million in annual revenue. I think that's the run rate they're on for 2019. In the grand scheme of the $16 billion that they've pulled in over the last 12 months, not that consequential. But over the next five years, this is what you expect to be a very large component of the revenue mix for PayPal. Anything that throws that off its trajectory is going to have people scared.
Frankel: Absolutely! I'm optimistic because it's not just one person who's behind Venmo. I don't know how many employees they have that are working exclusively on Venmo right now, but I'd have to imagine it's in the hundreds, at least.
Lewis: I would think so. I hope so, as someone who loves the service, uses the service, and is a shareholder.
Frankel: The point is, the success doesn't just rise and fall with whoever's the captain of the ship. It takes a whole crew to do it. I love buying companies on dips like this. I was very tempted to add to Square when they let Sarah Friar go, but I couldn't stop talking about it so I wasn't allowed to buy anymore. We've run into similar issues constantly.
Lewis: Yes. That's the issue that you run into with having strict trading guidelines.
Frankel: Right. I don't have any PayPal in my portfolio right now. I used to, I inherited it in the eBay spinoff. But after a move like this, if we still see depressed prices, I'd be very tempted. These are good situations for long-term investors. Will they get over this uncertainty? Will they figure out how to move forward and carry out their vision? I believe they will. I love investing in situations like this where the only X factor is the departure of a key executive.
Lewis: Yeah. And you have to think, he's been at the company now for something like five and a half years, he's not leaving for another six months, so he has the opportunity to lay out the blueprint for where things should go and make sure that the people that they bring in to help him execute on that do that. It's not like, "OK, here's the bag, I'm running off." There is time to set up all this stuff and for them to create a pretty solid roadmap. Hopefully they can execute on that.
Frankel: Right. That's roughly 10% of his entire tenure of the company that's still ahead of him, when you look at the numbers. So yeah, he still has a lot of time to get them in a good place to move forward.