Why PayPal Stock Roared Higher on Wednesday

What happened

Shares of PayPal (PYPL 12.18%) surged higher Wednesday, jumping as much as 11%. As of 11:17 am ET, the stock was still up 10.7%.

The catalyst that sent the fintech pioneer higher were reports that an activist investor has taken a stake in the company.

So what

Well-known activist investor Elliott Management has been accumulating PayPal stock, according to a report in The Wall Street Journal. While the size of the stake hasn’t yet been disclosed, Elliott could eventually become one of PayPal’s five biggest shareholders, according to a report by Bloomberg.

Elliott Management plans to pressure PayPal to ratchet up its cost-cutting measures, according to “people familiar with the matter,” the Journal reports. The company has been cutting jobs and shuttering some offices in an effort to rein in expenses.

PayPal shares have been in free fall this year, down as much as 64% from highs reached late last year, as the company was forced to change gears in the wake of shifting macroeconomic conditions. It said that consumer spending, particularly among lower-income users, was throttled by 40-year-high inflation. That, combined with slowing e-commerce growth, caused the shift in strategy.

In light of changing consumer spending behavior, management announced plans to focus on boosting the engagement of its existing users. PayPal also said it would scale back its ambitious plans to nearly double its active user base to 750 million in view of the shifting economic landscape. This change in strategy spooked investors, sparking a monthslong sell-off.

Now what

PayPal has taken a number of steps to reduce spending and strengthen its financial position, which are the things an activist investor would likely agitate for.

Furthermore, management has gone to great lengths to justify its change in strategy. PayPal has said that there is a very low return on invested capital for marketing dollars spent to attract new users. At the same time, 30% of the company’s active users account for 80% of transactions. By boosting engagement of existing users, PayPal can ultimately increase its revenue.

We’ll get further insight into whether this strategy is bearing fruit when PayPal reports its second-quarter results on Aug. 2.

Danny Vena has positions in PayPal Holdings and has the following options: long January 2024 $95 calls on PayPal Holdings. The Motley Fool has positions in and recommends PayPal Holdings. The Motley Fool has a disclosure policy.

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