Originality doesn't earn you points in the business world. Sometimes copying another company's plan is a great strategy, as you can already see how it worked out. That's exactly what PayPal's (PYPL -2.62%) new chief executive officer, Alex Chriss, is doing. By taking a page from Amazon (AMZN 2.29%) CEO Andy Jassy, who took over from the legendary Jeff Bezos, he's looking to improve the company substantially.
But is this copycat strategy a good idea? After all, the two are entirely different businesses.
PayPal's efficiency focus will be similar to Amazon's
If you've followed Amazon since Jassy's takeover, it's clear it's been laser-focused on one item: efficiency. The trajectory Bezos sent the company on in his final years may have been great for growth, but it was inefficient. It took some time for Jassy's efficiency efforts to kick in, but the wave has turned in recent quarters.
Data source: YCharts
Now Chriss looks to do the same as he takes over from long-time PayPal chief Dan Schulman. His quote in PayPal's Q3 conference call clearly defines his vision for what PayPal can be:
Simply put, our cost base remains too high and it's actually slowing us down. As such, I am in the process of evaluating our most profitable growth priorities and aligning our resources to those priorities. We will become leaner, more efficient, and more effective, driving greater velocity, innovation, and impact for customers.
That echoes what Amazon has done, which has worked out great for the company.
But how much juice is there to squeeze from PayPal's finances?
PayPal's gross margins could use some help
Chriss's emphasis on efficiency versus growth is almost out of necessity. Over the past year, PayPal's growth efforts haven't been successful, and the company continues to post revenue growth in only the high single digits to low double digits.
Data source: YCharts
With little growth, he must turn to other areas to improve profits. One area that has consistently seen headwinds is transaction costs, which have caused PayPal's gross margins to plummet.
Data source: YCharts
By becoming more efficient in its cost of revenue, PayPal has a huge opportunity to help its overall profit picture.
But what will PayPal do with the extra cash it generates from improved margins?
Buybacks will fuel PayPal's growth
PayPal has been aggressively buying back shares with its cash flows, and there's not much reason to believe that will change with a leadership transition. After all, PayPal's stock is unbelievably cheap right now.
Data source: YCharts
At less than 17 times trailing and 11 times forward earnings, PayPal's stock is cheap compared to the S&P 500, which trades at 25 times trailing and 18 times forward earnings. Essentially, the stock is priced at a significant discount to the market while posting decent growth. It's probably wise to repurchase as many shares as possible while the stock is such a bargain.
Since 2022, PayPal has reduced its share count outstanding by nearly 8%, an impressive feat in such a short time frame. This makes each share more valuable -- but if the stock price declines in tandem, it doesn't help shareholders out. However, a stock will only remain cheap for so long if it continues executing, and investors can also capitalize on the dirt-cheap share price by taking a position now.
PayPal has a new leader focused on taking the business to its next investment phase. I think this is the best possible strategy for PayPal, and the plan to repurchase shares over the long haul will benefit shareholders. At this time, PayPal's stock is too cheap to ignore -- but you'll have to be patient if you take a position, as turnaround plays can take some time to work out.
