Will another forecast cut keep the PayPal share price down?

As PayPal prepares to report its Q2 earnings on 2 August, Elliott Management has been building a stake in the company, boosting shares up 21% in the last month. However, in the year-to-date, the stock has been challenged and could be further pressured amid its restructuring strategy to cutback costs. As a result, analysts are forecasting a second guidance cut in the upcoming earnings. 

In the lead up to PayPal’s [PYPL] Q2 earnings after the market closes on 2 August, activist investor Elliott Management has reportedly been building a stake in the payment processor.

According to those familiar, Elliott Management wants to have a say over the direction the future of the company goes in, reported Bloomberg. The talks are amicable and would likely result in Elliott Management getting a place on PayPal’s board.

The PayPal share price rose more than 11% to $86.42 on 27 July after the news but pulled back in the days following, closing at $86.53 on 29 July. Although the stock has gained an impressive 21% in the last month, it has plunged 54.11% since the start of the year.

A combination of people returning to buying in-store post-pandemic and inflation curbing spending has hampered PayPal’s growth and dragged its valuation down. The company began laying off workers in May, spending $100m on severance payouts and other job-cutting expenses. The restructuring strategy could save it $260m a year.

Weaker outlook issued in Q1

The job cuts followed the company’s Q1 earnings report. In the trading update, revenue rose 8% year-over-year to $6.5bn, narrowly beating the $6.41bn consensus, while user growth was also robust. Non-GAAP earnings per share (EPS) were in line with expectations at $0.88 per share — it absorbed an incremental $0.03 of earnings pressure because of suspending its transactional services in Russia.

However, the company lowered its full-year profit outlook. Adjusted profit has been lowered from a previous forecast of between $4.60 and $4.75 per share to between $3.81 and $3.93 per share. Full-year revenue is expected to grow between 11% and 13% versus its earlier forecast of between 15% and 17%.

Non-GAAP EPS for Q2 is expected to be $0.86 per share, which is in line with analyst estimates, according to Zacks. It would, however, be a 26% decline on the $1.15 per share reported in Q2 2021.

Revenue is forecast to climb 9%, but there are “tough comps”, according to CEO Dan Schulman (pictured), since Q2 2021 was the last full quarter to include eBay [EBay] revenue. The marketplace dropped PayPal as its main payment processor in June last year.

The company withdrew its medium-term outlook citing the current macroeconomic conditions. “Make no mistake, we have strong conviction in the growth potential of our business and our ability to sustainably create value for our shareholders. However, we recognise the need to level-set expectations in what remains a dynamic environment,” Schulman said on the Q1 earnings call.

Analysts expect a second PayPal forecast cut

One of the questions investors are asking heading into Q2 earnings is whether PayPal will slash its full-year forecast once again. Bernstein analyst Harshita Rawat expects another guidance cut. The current forecast “looks rather rosy against a backdrop of worsening ecommerce trends, uncertain macro, persistent inflation and strengthening dollar,” Rawat wrote in a note seen by MarketWatch.

On the flip side, Jefferies analyst Trevor Williams believes PayPal’s current guidance has “built in enough cushion for incrementally weaker trends”.

The Q2 earnings call should be an opportunity to hear more about the company’s plans to increase operating leverage. It previously stated that its focus is on simplifying operations.

If Elliott Management successfully gets a place on PayPal’s board then it is expected to push for cost-cutting to be sped up. Reining in costs should help to boost profits and improve investor sentiment.

Despite the near- and medium-term challenges, Wall Street is overwhelmingly bullish on PayPal. The stock has 29 buy ratings, 12 hold ratings and one sell rating, according to MarketBeat data. The consensus target price is $142.60, which implies an upside of 64.7% from the most recent closing price.