In August, financial technology (fintech) pioneer PayPal Holdings (PYPL +0.91%) named Alex Chriss as its new president and CEO. Chriss officially took over on Sept. 27. Now four months later, Chriss has scheduled a presentation for Jan. 25. And in an interview with CNBC, he said the presentation will "shock the world."
This was Chriss' first interview since taking over at PayPal, and it certainly made an impression with investors. Since Chriss promised to shock the world, PayPal stock is up more than 10%. For perspective, PayPal stock was down about 14% in 2023, underperforming the 24% gain for the S&P 500 index by a wide margin.
After a couple of years of lackluster results, can PayPal truly shock the world and finally turn things around for shareholders? The answer is surprisingly "yes," with an important caveat.
NASDAQ: PYPL
Key Data Points
How PayPal can turn things around
According to Chriss, PayPal has been too slow to innovate, and that's why it's having an innovation-day presentation on Jan. 25. The new CEO said that the company is "going to revolutionize commerce again through AI-driven personalization for both consumers and merchants."
Let's unpack the possibilities here. First, the company ended the third quarter of 2023 with nearly 400 million active consumer accounts and around 35 million active merchant accounts. The scale of this business is massive, processing well over $1 trillion in annual payment volume. And that scale means it has a lot of valuable consumer data.
Way back in February 2021, then CEO Dan Schulman alluded to this fact by saying, "We have a platform with hundreds of millions of consumers that are basically telling the merchant 'here's what I want'." The idea was to provide tools to leverage the consumer data that it had.
PayPal doesn't seem to have done this yet, or at least it hasn't done it well. But with the rise of artificial intelligence (AI), perhaps the company's longtime vision is now closer to reality. After all, that's where AI is at its best: processing large datasets in search of insights that would otherwise go overlooked.
When asked how this helps PayPal, Chriss gave a surprisingly simple answer but one that I believe is on target. He basically said that if you provide a value proposition to users -- a reason to choose it over competitors -- then the business will grow.
Consumers are looking to save money, and merchants are looking to increase sales conversions. Chriss believes that AI can provide better personalization and better conversion, delivering a value proposition in this regard. Investors will learn more in the upcoming presentation.
What's been holding PayPal back
In recent years, PayPal has lost focus, according to Chriss, by pursuing needless acquisitions and low-margin opportunities. And looking at the five-year chart, it's hard to disagree with that assessment. As the chart below shows, the company's growth rate has plunged, and its free cash flow is well below where it used to be.
PYPL Revenue (Quarterly YoY Growth) data by YCharts
For one acquisition example, remember that PayPal acquired browser extension Honey for $4 billion in 2020. Today the company barely even mentions its existence. And it has nearly $11 billion in overall goodwill, suggesting it's overpaid significantly for past acquisitions.
Turning to free cash flow, PayPal has been hurt by its buy now, pay later (BNPL) product. It had to supply some of its own cash to fund the loans.
According to Chriss, PayPal is going to be more focused. It's not going to pursue acquisitions and it will be funding BNPL through partners in the future. Therefore, it looks like it's correcting past mistakes. And Chriss says the focus will be on innovation to outcompete its rivals in the coming year and beyond.
Therefore, to circle back to the beginning, PayPal can turn things around for shareholders by correcting mistakes. And if the company winds up being a true innovator in the fintech space through AI, then I would wager that would shock the world -- right now, many view it as a laggard when it comes to being at the forefront of innovation.
However, the aforementioned caveat is this: Chriss is essentially pitching a turnaround plan for PayPal, and not all turnarounds pan out in the end.
For now, investors should take things at face value. It certainly sounds like PayPal is making good moves, and hopefully the company will unveil promising details to its innovation plan very soon. So there's reason to hold. However, investors will likely want to see more tangible proof that the plan is working before buying more shares.
