PayPal CEO's first year was praised by Wall Street, but hard part starts now for struggling payments company

• PayPal CEO Alex Chriss just wrapped up his first year on the job at the payments company, which was in a protracted downturn when he took over.
• Bolstered by cost cuts and improved margins, the stock jumped 34% in the third quarter, which closed Monday, its best quarterly performance since 2020.
• "The news flow has been out of this world amazing, in terms of the way they manage expectations," said Dan Dolev, an analyst at Mizuho Securities.

In January, about a hundred days into his job as PayPal CEO, Alex Chriss told CNBC's David Faber that the payments company hadn't had much to celebrate in recent years. But Chriss confidently said he was prepared to "shock the world."

"I love being an underdog," Chriss said in an interview on "Squawk on the Street," from the floor of the New York Stock Exchange. He was responding to a question about a recent spate of analyst downgrades.

Dan Dolev of Mizuho Securities was among the skeptics. He cut his rating to the equivalent of a hold on Jan. 16, the day before Chriss' CNBC appearance, headlining his report, "PayPal faces competitive pressure from 'A' to 'Z.'" The A was for Apple Pay, and the Z represented payments app Zelle, a money transfer service jointly owned by seven of the top U.S. banks.

A few weeks later, PayPal issued weak guidance in its fourth-quarter earnings report, knocking the stock down 11% and justifying Dolev's concerns.

PayPal appeared to be in deep trouble. Its market cap was down more than 80% since peaking in mid-2021. The company had just cut 9% of it workforce, about 2,500 jobs, and was mired in single-digit growth. Analysts across Wall Street saw rising competition and a declining take rate, or the percentage of revenue PayPal keeps from each transaction.

Fast forward to today, and the picture is dramatically brighter for the 26-year-old Silicon Valley company and its 47-year-old CEO.

Chriss hit his one-year anniversary at the helm on Friday. In the third quarter, which ended on Monday, PayPal shares jumped 34%, their biggest quarterly rally since mid-2020, when the early days of the Covid pandemic fueled a surge in online shopping. It was the first time in eight quarters that PayPal outperformed the Nasdaq, which gained just 2.6% in the past three months.

Dolev bolstered his rating back to a buy in May. In July, the company lifted its full-year profit forecast for a second time and increased share repurchases. Chriss said in the earnings release that the company was now "operating from a position of strength." The stock rose almost 9%, its best day since late 2022.

"I think he's been nothing but a phenomenal success story so far," Dolev said. "The news flow has been out of this world amazing, in terms of the way they manage expectations."

Susquehanna's James Friedman lifted his rating on PayPal to a buy in early July. He said Chriss was "setting the bar high" with his comments on CNBC, but said he's been delivering on his bold promise to shareholders.

"You know how he shocked the world?" Friedman said. "He actually beat his numbers."

Much of Chriss' early success has been tied to improved transaction margins and better monetization of key acquisitions like Braintree, which is used by Meta for credit card processing, and payments app Venmo, which is becoming more popular with businesses.

Having cut a lot of the fat in the organization and with a renewed focus on profitability, Chriss has finally sparked some excitement on Wall Street after succeeded Dan Schulman, who retired following almost a decade as CEO.

"It was time for some new blood at PayPal," said Dana Stalder, a startup investor at venture firm Matrix Partners who served as PayPal's commercial chief from 2004 to 2008. "He's made a lot of changes very quickly, and I think he has substantially increased the focus on the consumer, which is the right thing."

'Wholesale changes' in leadership

Now comes the harder part — reigniting growth.

Analysts are projecting roughly 6% revenue growth when PayPal reports third-quarter results in about a month, according to LSEG. For the fourth quarter, they expect growth of 5.5%. Sales are only expected to get marginally stronger in 2024, with analysts expecting growth of under 8% for the full year.

PayPal didn't make Chriss available for an interview for this story.

In the July earnings call, Chriss said of the firm's next steps that "while change takes time and we still have much work ahead of us, we are well positioned today, have the right leadership in place and are moving full steam ahead."

Chriss, who spent 19 years at tax software provider Intuit before joining PayPal, took little time before he started overhauling the management team. In November, he brought in Isabel Cruz from Walmart as chief people officer, Michelle Gill from Intuit to run a new small business and financial services group, Diego Scotti from Verizon to oversee the consumer group as well as marketing and communications, and Jamie Miller from EY as CFO.

"He has turned over, from what I can tell, the vast majority of the leadership team," Stalder said. "It's been wholesale changes."

Early in his tenure, Chriss publicly identified some of the reasons, in his view, that PayPal had been struggling to find its footing. He highlighted an overly aggressive strategy of expansion through deal-making.

"We have done too many acquisitions over the last few years, and we've been defocused," Chriss said in the January interview with Faber. "It was one of the things I noticed when I came in 100 days ago."

Chriss added that the company had narrowed down its priorities to five key things, "all focused on profitable growth."

The most important metric to fix, he said, was transaction margin dollars, which is how the company gauges the profitability of its core business. Among Chriss' strategies to address the deteriorating margin was to offer merchants increased value-added services, such as connecting a couple of data points at checkout to drive down the rate of cart abandonment.

He said in January that 35 million merchants use PayPal and "when we improve their conversion rate, it improves their business, it improves our bottom line."

PayPal noted to shareholders in its latest earnings report that its branded checkout, along with Braintree and Venmo, helped the company achieve its highest growth rate in transaction margin dollars since 2021. Overall transaction margin dollars increased 8% to $3.6 billion.

Susquehanna's Friedman says a career at Intuit is the perfect training ground for learning how to mastermind a stock recovery. Speaking to executives there is like "talking to a dashboard," he said.

"The source code to engineer a higher stock is profitability," Friedman said. Chriss "really boils down his management style to the things that count" and "reducing what's irrelevant," he added.

With Venmo, the goal is to turn one of the most popular choices for money transfer from a strictly consumer app, which has no transaction fees, to a product for merchants. DoorDash, Starbucks and Ticketmaster are among businesses now accepting Venmo as one way that consumers can pay.

Singing at the gas pump

Getting competitive at the point of sale is another big priority. That's led PayPal to Will Ferrell.

The company launched a national campaign last month for PayPal Everywhere, offering 5% cash back for using a PayPal debit card within the mobile app. Ferrell, the pitchman, can be seen in a commercial using the PayPal app to buy lemonade and gas, while singing a parody of Fleetwood Mac's "Everywhere."

Stalder says PayPal is way behind Apple and Google, which own the dominant smartphone operating systems with their own embedded digital wallets.

"PayPal has been stuck because it's less convenient than the mobile wallets, No. 1," Stalder said. "And No. 2, it hasn't worked offline."

But Stalder sees a real opportunity for PayPal, in part because Apple has just opened the Secure Element on iOS so that other developers can more easily use the phone for contactless payments, putting them on a more equal plane with Apple Pay.

That development allows PayPal to "ride the mobile wallet rails for the first time and make some real headway in offline payments," Stalder said.

PayPal's other point-of-sale effort is called Fastlane, a one-click payment option for online sales that can go head-to-head with Apple Pay and Shop Pay by Shopify. In August, fintech platform Adyen made Fastlane available to businesses in the U.S., and said it plans to expand the offering globally in the future.

Chriss told investors on the earnings call that the company is urgently pushing to meet the holiday rush.

"We need to get it on as many platforms as we can so that small businesses in particular can just one-click a button and turn it on for the holidays," Chriss said. "We're working with many of our large enterprises who want access to this before the holidays as well."

'No drama'

Chriss' long history at Intuit gave him an intimate understanding of the expansive world of small- and medium-sized businesses. That experience could be crucial as PayPal targets SMBs with its various payment and checkout options.

Sanjay Sakhrani, an analyst at KBW, said going further down market allows PayPal to command better economics because there's so much more competition when going after enterprises.

"To the extent that they can broaden their reach there, I think that could be quite lucrative," said Sakhrani, who has a buy rating on the stock.

Chriss calls SMBs an "untapped opportunity for us," adding on the earnings call that those companies don't want to "piece together 17 different solutions."

"Small businesses are – they're fighting for every customer," Chriss said in July. "They need to be able to find customers. They need to be able to engage with customers, convert them, and then reengage with them."

Venture capitalist Oren Zeev has seen Chriss work with small businesses in another capacity. They served together on the board of home design startup Houzz, whose customers include a lot of architects and contractors.

"He obviously brought a lot to the table with his vast experience with small businesses," Zeev said. As a communicator, Zeev described Chriss as "no drama" and "respected by everyone."

While he's quickly captured the respect of investors, who have lifted PayPal's market cap by over $20 billion in the year since Chriss started, there's a lot more to do.

The stock remains about 75% below its record high. Sakhrani says shareholders are "anxiously awaiting his multiple-year outlook" as opposed to just "trying to fix some of the stuff that was broken."

"There's going to be some pressure at some point in time, in the near future, for more definition around that," Sakhrani said.

Chriss, for his part, isn't declaring victory.

"Our teams are moving with urgency, excited about our innovation and focused on execution," he said on the second-quarter earnings call. "We are still early in our transformation and while pleased with our progress in many areas, we know there is much more we can do and with greater speed."

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