PayPal's crypto offering could be facing its last days if activist hedge fund Elliott Management has its say.
The hedge fund recently took a stake in the beleaguered payments behemoth, according to the Wall Street Journal. The amount of the stake and what Elliott paid was not disclosed.
Elliott could encourage PayPal to eliminate its crypto offering that was launched in 2021.
One reason that Elliott was drawn to the payments company is that it has $8 billion of cash and short-term investments.
Activist investors often want the management team of companies to be more aggressive in how they distribute a cash reserve.
The hedge fund could wind up one of the five largest shareholders of PayPal, according to a Bloomberg report.
PayPal launched its crypto platform in early 2021, allowing people to invest in bitcoin, ethereum, litecoin and bitcoin cash. Its consumer payments app Venmo also launched the ability to own crypto in April 2021.
Instead of spending time on cryptocurrencies, PayPal should focus on its main offering of providing payment transactions which is profitable, said Dan Dolev, an analyst at Mizuho Securities.
Following this strategy could yield the company a margin improvement by 10 percentage points because money would not have to be spent on sales, marketing and research and development as PayPalworks to create a "Super App."
PayPal spent about 16% of its revenue on sales and marketing in 2021 compared to its payments competitors who only allocated mid -to high-single digits, Dolev wrote in a research report. PayPal’s R&D is also higher at 20% of revenue, compared to payments companies which disclose the amount.
Wolfe Research’s Darrin Peller said Elliott could see this as an opportunity to push PayPal to lower its expenses and increase stock buybacks.
The payments company has “room for further efficiencies” on costs since its sales and marketing expenses rose about 75% from 2019 to 2021, he wrote.
“Our checks suggest that PYPL’s marketing spend and M&A [merger and acquisition] integration costs can be more efficient,” Peller said.
In March, PayPal changed how it charged people for owning the virtual currencies. Transactions that are $200 or less pay a minimum flat fee instead of its previous percentage cut.
The payments behemoth surged during the global pandemic as consumers spent their money on goods they could purchase online. Investors reaped the rewards.
As the pandemic has eased people have embraced traveling and spending more time at concerts and sporting events. PayPal stock plummeted by 60% after it slashed its 2022 earnings forecast.
In April, PayPal reported it added 2.4 million net new active accounts during its first quarter.
Shares of PayPal tanked again last October when news surfaced that the company was considering purchasing Pinterest, a social media company.
In July, Elliott Management was reported to have attained a stake of more than 9% in Pinterest.
The hedge fund was managing $50 billion at the end of 2021 and is famous for being an active hedge fund investor, running campaigns at companies including AT&T Inc. and Twitter Inc.
PayPal's recent issues put the company in the penalty box and is not a stock pick, said Wells Fargo analysts in May.
“PYPL is still in the midst of a few company-specific near-term headwinds (management transition, lowering 2022 guidance and execution).”
PayPal reports earnings on Aug. 2.
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