After a post-earnings price jump, is PayPal a good investment?

Since the company released better-than-anticipated Q2 results earlier this month, shares of PayPal have increased by 6%. But does that imply that the stock is a good buy at the moment?

This article first appeared on MarketBeat.
Since the company reported better-than-expected second-quarter results earlier this month, shares of PayPal Holdings (NASDAQ: PYPL) have increased by 6%.

Website: MarketBeat MarketBeat Revenue increased 9% to $6.8 billion, but earnings per share decreased 19% from the same quarter last year to $0.93. The company outperformed analysts’ forecasts, which called for revenue of $6.78 billion and earnings of $0.87 per share.

Two important announcements were also made by the company.

1) PayPal launched what it refers to as “an invigorated capital return program,” which includes a fresh $15 billion share buyback authorization and a thorough analysis of alternative capital return options.

This is happening at the same time that Blake Jorgensen, a new CFO, is taking control of the business’ financial operations, which is not a coincidence.

In the first half of this year, PayPal repurchased shares for $2.25 billion, according to the company’s earnings announcement. According to the business, this accounts for roughly 95% of the free cash flow produced in the first half. For the fiscal year 2022, it was also stated that share repurchases should total around $4 billion.

What makes buybacks important?

Companies take this action for a variety of reasons, including internal analyses that suggest shares may be undervalued.

Earnings per share will undoubtedly rise with fewer shares being issued. Consequently, a buyback can raise a share’s value for current owners.

2) The business added that it conducted a “comprehensive operational review” to find significant opportunities for efficiency gains and expansion projects.

In other words, it aims to increase growth while reducing costs. It disclosed company-wide cuts totaling about $900 million.

According to the press release, “On an annualized basis, these savings from FY’22, when combined with other initiatives, are expected to generate savings of at least $1.3 billion in FY’23.”

Regarding cost-cutting, PayPal announced layoffs earlier this year and recorded a charge of $71 million in the second quarter to cover severance payments and associated costs. In the end, it’s anticipated that the layoffs will reduce expenses by about $260 million in 2022.

The activist investor worth $2 billion

The business also included a statement from Jesse Cohn, managing partner at Elliott Investment Management, in the press release. Cohn stated, “Elliott strongly believes in the value proposition at PayPal and is one of PayPal’s largest investors with an investment of approximately $2 billion. The announcement made today lists several actions that have been taken or are in the works to help the company realize its significant value opportunity.

Since Elliott is a well-known activist investor, it will have a say in cost reductions and other operational choices that affect company profitability.

So how were these moves received by institutional investors overall, who make up about 75% (or more) of trading volume?

Shares gapped up 9.25% after the report, so there was undoubtedly some initial excitement. Since then, some selling has occurred, which is common.

Even when the stock remains significantly below prior highs, as is the case with PayPal, some investors view a significant price change as an opportunity to take some profits. For instance, the gap-up would have been a simple place for a hedge fund to lock in some gains if it had bought shares when the stock was trading lower in May, June, or July.

How PayPal Compares

The performance of PayPal and two other well-known stocks in the larger sub-industry of electronic payments over the previous month is as follows:

+15.68% via PayPal