Is PayPal a buy after price jump after profit?

Shares of PayPal Positions (NASDAQ: PYPL) are up 6% since the company reported better than expected second quarter results earlier this month.

Earnings fell 19% year-over-year to $0.93 per share, while revenue grew 9% to $6.8 billion. The company exceeded analyst expectations, who posted earnings of $0.87 per share on revenue of $6.78 billion.

The company also made two major announcements.

1)

PayPal has put in place what it calls ‘a strengthened capital return program’, including a new $15 Billion Share Repurchase Authorization and a comprehensive evaluation of alternatives to return on capital.

Not coincidentally, this is happening now that a new CFO, Blake Jorgensen, takes over the helm of the company’s financial activities.

Publishing the results, PayPal noted that it returned $2.25 billion to shareholders in the form of share buybacks in the first half of this year. The company said this represents about 95% of the free cash flow generated in the first half. It added that share buybacks for fiscal year 2022 should be about $4 billion.

Why are buybacks important? Companies do this for a variety of reasons, including internal valuations that indicate stocks may be undervalued.

With a smaller number of available shares, earnings per share will naturally increase. So a buyback can increase the value of a stock to existing owners.

2)

The company also said it has conducted a “comprehensive operational assessment to identify substantial efficiencies and growth initiatives.”

In other words, it is cutting costs while striving for higher growth at the same time. It announced about $900 million in cuts across the company. “

The press release continued, “On an annualized basis, these savings in FY’22, combined with additional initiatives, are expected to deliver savings of at least ~$1.3 billion in FY’23.”

In the context of cost cutting, PayPal announced layoffs earlier this year and incurred a $71 million charge in the second quarter to cover termination benefits and related costs. Ultimately, the layoffs are expected to cut about $260 million in costs by 2022.

The $2 Billion Activist Investor

In addition, the company included in the press release a statement from Jesse Cohn, managing partner at Elliott Investment Management. Cohn said: “As one of PayPal’s largest investors, with an investment of approximately $2 billion, Elliott believes strongly in the value proposition at PayPal … Today’s announcement highlights a number of steps that have been taken and are underway to deliver the significant help realize value opportunity at the company.”

Elliott is known as an activist investor, meaning it will have a say in the cost savings and other operational decisions related to the profitability of companies.

So how did institutional investors, as a whole, those representing about 75% (or more) of the trading volume greet these moves?

Enthusiasm was definitely there at the beginning, as stocks jumped 9.25% right after the report. Since then, some have been sold, which is not unusual.

Some investors see a big price move as an opportunity to take some profit, even if the stock remains well below previous highs, as is the case with PayPal. For example, if a hedge fund had bought stocks when the stock was trading lower in May, June or July, the gap would have been an easy place to lock in some gains.

How PayPal stacks up

Here’s how PayPal and two other prominent stocks within the broader electronic payments subsector have performed over the past month:

Despite PayPal’s outperformance and some clear signs of renewed institutional buying, there are still some risk factors. Notably, PayPal stocks trade below both their 10-day and 21-day moving averages.

In addition, the 200-day moving average is above the short-term lines, meaning there isn’t enough momentum in the near term. However, when (not if) the 50-day line crosses the 200-day mark, that could be a signal that an uptrend has some staying power.