- PayPal (PYPL) shares got a brief boost as the result of hype surrounding activist investorElliott Investment Management'sstake in PayPal.
- Retail investors should be wary as PayPal is currently unprofitable.
- You don't have to buy PYPL stock just because the financial media is over-focused on activist-investor mania.
PayPal (NASDAQ:PYPL) stock has had a spectacular month, but its second-quarter 2022 fiscal resultshad some negative points that some investors are likely ignoring, but shouldn’t.
Furthermore, it would be hasty to buy PYPL stock just because activist investorElliott Investment Managementtook a position in the shares.
There’s a phenomenon in the financial media that might be called activist-investor mania. It’s a real headline-grabber when a firm like Elliott takes a large share position in a company. That’s because traders might speculate about how Elliott might force the company to make changes.
However, just because the financial media is hyped up about Elliott’s stake in PayPal, doesn’t necessarily mean that you have to get caught up in the mania. At the end of the day, you should conduct your own due diligence. And, a deeper dive into PayPal’s financials will reveal some worrisome facts.
Activist Investor Narrative Pumped PYPL Stock
As The Wall Street Journaland other media platforms reported on Elliott’sroughly $2 billion investmentin PayPal, the payments processor’s shares suddenly gained 13% in value. Thus, it’s conceivable that any benefits to PayPal to be derived from Elliott’s influence were immediately priced in to PYPL stock.
It’s not exactly “buy the rumor, sell the news.” Rather, this share-price jump represented an extremely forward-looking, efficient and hope-filled market.
PayPal’s long-term investors had a rough 2022 so far (the stock still is down nearly 50% this year) and were desperate for some good news.
Was this necessarily good news, though? If PayPal is in such rough shape that the company’s in need of major, forced changes from an activist investor, that’s probably not a positive sign.
PayPal Isn’t a Profitable Business
Moreover,Bloombergreported that Elliott plans to push for PayPal toramp up its cost-cutting efforts. These efforts have included firing workers and closing down offices.
However, there’s no guarantee that a shrinking PayPal will be a better company. Yet, PYPL stock has likely already priced in a positive future impact from PayPal’s cost-reduction measures.
Besides, just because Elliott is buying PayPal shares, doesn’t mean that you have to buy them. You have to be your own advocate as an investor, and conduct careful due diligence.
For example, did you know that, during 2022’s second quarter, PayPal showed no sequential growth in active customer accounts?
Also, PayPal’s Q2 2022 international net revenue declined slightly on a year-over-year basis. In addition, PayPal’s 5% sequential revenue growth isn’t really much to brag about.
Finally, prospective investors should observe that PayPal swung from $1.184 billion net income in the year-earlier quarter, to a $341 million net loss in Q2 of 2022. In other words, this once-profitable company is now unprofitable.
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