The PayPal Pivot
/Between August and December of 2015, Chipotle restaurants around the country suffered from outbreaks of E. coli, norovirus, and salmonella. It was a contradiction to the company’s brand image that left founder and CEO Steve Ells scrambling for a solution—and an explanation. The stock fell by more than 40%, prompting the activist investor Bill Ackman to buy a stake in 2016.
Then it happened again. In the summer of 2017, Chipotle suffered another norovirus outbreak, and Ells was pushed out. The stock had fallen about 60% since the outbreaks began.
Ells’ solutions were acceptable, but uninspired: a new emphasis on food cleaning, free burritos, a refreshed menu, and much more marketing. Without the 2017 outbreak, the company would have recovered on its own (jack-in-the-box had survived a much more serious E.Coli outbreak in 1992 and 1993, where 4 children died). But a new perspective was needed.
In 2018, Brian Niccol took over as Chipotle’s CEO and brought that new perspective. Niccol, who had already contributed to a turnaround at Taco Bell, shifted the company’s strategy: continue fixing the food safety problems, building new restaurants, and creating new menu items, but also include some simple changes, such as more online ordering and drive-through sales. Chipotle almost instantly recovered, and the digital focus helped the company thrive during the pandemic. Since he took over, revenue exploded by about 800%.[1]
In August 2024, Starbucks poached Brian Niccol, announcing that he would be the company’s new CEO. Because of his reputation as a turnaround expert, the stock rose by about 25% in just one day. The market rarely shows this much confidence in a new CEO, but he earned it.
And I have that same confidence in PayPal CEO Alex Chriss.
The Pandemic
PayPal is already a well-known online payments company, so I’ll skip the long explanation of PayPal’s history and PayPal’s different businesses. This is about how the company is defined. I’ve been following PayPal since I discovered it in 2008, when it was part of eBay. I considered it the most valuable part of eBay, and I agreed with Carl Icahn’s push to split the two companies, which finalized in 2015. This is where the good data starts.
From my perspective, what matters for PayPal is total payment volume (or TPV, the dollar value of transactions on the platform) and take rate (how much PayPal makes as a percentage of the transaction). Since 2015, PayPal has dramatically increased TPV while losing take rate.
For the broader business, it’s a similar story. While PayPal’s revenue had healthy growth, net income stagnated. It wasn’t a crisis, but a treadmill—a race to grow fast enough to overcome lower margins.
PayPal had two problems at the same time:
The pandemic accelerated TPV growth, pulling in what management estimated to be about 3 to 5 years of normal growth within a single year. The company recorded its fastest-ever TPV growth in the fourth quarter of 2020.
Losing eBay’s business, combined with stronger competition, slowly crushed PayPal’s take rate.
To take advantage of the pandemic and offset the smaller take rates, the company invested heavily in attracting new users. The remarkably fast growth made PayPal a pandemic stock, rising from about $100 to over $300.
Like other pandemic stocks, this growth was not sustainable. As the pandemic boost faded, PayPal’s management realized that they had made a mistake—the new accounts that PayPal attracted were not a reliable source of repeat business.[2] They shifted strategy from finding new accounts to increasing the number of transactions per account.
Total active accounts and transactions per account are the two best ways to grow TPV. When the pandemic forced everyone to look online, it made sense to aggressively reach for new accounts. But it also made sense to encourage valuable users to become more valuable (and it was a much better return on investment). Active accounts peaked, while transactions per account kept climbing.
Meanwhile, PayPal invested heavily in providing more payment features, such as physical credit cards, trading, budgeting, bill payment, etc. The point was to build a more attractive payments app (something that should have happened years earlier). The company also chased low-margin business to generate faster growth.
While the situation was not as dire as Chipotle’s health crisis, the response earns the same description: adequate, but uninspired. In the three years after the pandemic, PayPal had an average revenue growth of about 15% and an average net income growth of roughly zero. The stock fell by more than 80% from its pandemic peak, crashing right through the $100 pre-pandemic price.
The Pivot
PayPal enables online transactions in two different ways: “branded checkout” (PayPal; 29% of 2023 TPV) and “unbranded checkout” (the Braintree division; 35% of TPV). Branded checkout is the more profitable business, but unbranded checkout has been growing much faster. The company also owns Venmo (26% of TPV), a peer-to-peer money transfer service. It has been historically difficult for PayPal to earn any returns from Venmo, despite fast TPV growth.[3]
This is where Alex Chriss comes in. Chriss, hired away from Intuit’s Small Business and Self-Employed Group, became PayPal’s CEO in September of 2023. He immediately started making changes.
The first big changes were about people: Since joining PayPal, Chriss has brought in a new executive team and created new executive positions to manage the company’s new priorities. He also cut about 9% of PayPal’s workforce (after 7% had already been cut the previous year). It was a company reset that has enabled the pivot.
And with new people comes new ideas. Chriss looked at PayPal’s operations and understood that it can be more than just a payments company—PayPal has the potential to be a full payments and advertising platform. The company’s massive customer base comes with a massive amount of useful data. PayPal knows what people buy.
He separated customers into three buckets—consumers, small businesses, and large enterprises—and detailed plans for how to “delight” each group. The company’s new focus would be on profitable growth, where customers come first. Chriss defined PayPal’s 5 new operating principles:
Customer first
Profitable growth
Operating leverage
Transparency in performance
Strong balance sheet
What this means in specifics is a focus on branded checkout (the more profitable checkout product) and building stronger relationships with small businesses by unifying the entire PayPal platform. At the same time, he unveiled a set of changes designed to make using PayPal more attractive, such as faster checkouts, more efficient checkouts, and cashback offers. But the fresh part of the plan was in advertising:
Smart Receipts that recommend other purchases after the checkout process is completed.
An advertising platform where advertisers will only pay if people actually buy their products.
Redesigned Vemno business profiles that help businesses get more exposure and connection to customers.
2024 is the “transition year” for all of these changes.[4] And that phrase is often used as a code word for “bad year” in the start of a turnaround. But I don’t see this situation as a turnaround.[5] This is a pivot to something different.[6] PayPal was already a great company—it just wasn’t keeping up.
The Other Options
There is one thing that has continued through the transition—PayPal’s steady drop in share count. The company spent $4 billion on stock buybacks in 2022, $5 billion in 2023, and expects to spend $6 billion on stock buybacks in 2024. This represents nearly all of PayPal’s free cash flow during that time period.
With a free cash flow yield that has been close to 10%, this approach feels appropriate, and the company has the balance sheet to support it. But PayPal is not the only option for investors or customers.
There are far too many competitors to describe them all.[7] To keep it short, we’ll take a limited look at a few of the biggest players. Here is how some publicly traded fintech companies compare with PayPal right now.[8] By the numbers, this is the investor’s viewpoint at the end of the quarter:[9]
Most of these companies have multiple services and different types of services, and not all of them are PayPal competitors at every level. And PayPal has partnerships with almost all of them, the two most recent coming with Adyen and Fiserv to offer PayPal’s new Fastlane checkout product. It is a messy market.
From the customer’s viewpoint, there is also much more to consider:
Private competitors such as Stripe.
Marketplaces that offer their own payment systems, such as Shopify.
Major tech companies developing their own payment services, such as Google and Apple.
Other money transfer systems, such as Zelle or FedNow.
There are many different ways to do the same things that PayPal does, and that’s part of the challenge. But there is still enough room for several different digital payment options—the industry is projected to grow by more than 20% per year through 2030.
And if we assume that growth projection is unrealistic, what keeps PayPal relevant right now is the company’s size and brand value. Reliable market share data is difficult to find because customers can use more than one service (and many sources use misleading measurements for market share). But PayPal is still generally considered to be the biggest company in online payments, with a market share of somewhere between 35% and 50%, depending on the source and the products included. How it holds that position or improves that position will depend on how much PayPal can “delight” its customers. You have to trust Alex Chriss for that.
The New PayPal
Everything that I’ve presented here has also been described as reasons to avoid the stock. New accounting and compensation. A new team with new plans. New competition and new uncertainty. New variables that make it harder to predict what will happen next.
But that’s the point. The new plan has a purpose. The new team is building a better market position. The reality is that PayPal was never in danger of going out of business. The market misunderstood the company’s covid bump, and PayPal became “sleepy” as economic conditions returned to normal. Alex Chriss has brought new energy into the company, and it came with a better focus.
The PayPal pivot relied on three simple steps:
Identify what the business has been doing right and wrong.
Define what the business could be and what it should be.
Create a plan that puts customers first without compromising the company’s financial position.
This process works. Alex Chriss is doing the same thing for PayPal that Brian Niccol did for Chipotle. The new PayPal will be just like the old PayPal with a few extra features and a more targeted approach. And that’s why I see it as my most exciting investment.
Andrew Wagner
Chief Investment Officer
Wagner Road Capital Management
[1] Chipotle’s performance probably rescued Bill Ackman’s reputation. Before making that bet, his recent investment fund returns had been terrible after disastrous bets on Valeant (it collapsed) and against Herbalife (it didn’t collapse).
[2] At one point the company had gone so far into the “acquire users” strategy that it was rumored to be interested in buying Pinterest.
[3] There are many places to get more info about PayPal’s different businesses. I believe the best source is a Substack post from Popular Fintech.
[4] Chriss described these plans in the third quarter and fourth quarter conference calls for 2023. He also unveiled PayPal’s new features during a special presentation. There is also a dense VIC post that covers these changes and other parts of the PayPal story.
[5] I would call this a “strategic inflection point” as described in Andy Grove’s book, “Only the Paranoid Survive.”
[6] Even the company’s compensation structure and accounting methods were adjusted by investor feedback. Page 10 of PayPal’s Proxy Statement and Annual Report has the details on the compensation changes. PayPal also has a new logo.
[7] I covered part of the fintech sector in a blog post from 2022.
[8] Most of these companies are involved with different parts of the transaction process, so this is a simplified way of categorizing their role in payments. GR4VY has a good explanation of the differences.
[9] Sources for this table include company reports, Morningstar, Statistica, YCharts, and TSG. Some TPV numbers are estimated, and merchant acquirers are US volume only.
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