Stock Market

Are Recent Layoffs a Bad Omen for PayPal Stock?

  • PayPal (PYPL) recently laid off its next-gen tech team, raising questions about its relevance
  • The move highlights the confusing nature of PYPL stock, both fundamentally and technically
  • Conservative investors should tread carefully with PYPL stock
Source: Michael Vi / Shutterstock.com

PayPal (NASDAQ:PYPL) disclosed last week that it laid off its research team focused on advanced tech, such as quantum computing, cryptography and distributed ledgers. While the team only consisted of three employees and one contractor, it may be a warning signal that much-hyped innovations like the blockchain are more of a paper tiger than the real thing. I’m sure the news gave at least a few PYPL stock holders chills, on top of the 47% year-to-date loss.

Interestingly, one of the programs that the axed team worked on was a partnership with IBM (NYSE:IBM) to leverage quantum computing and machine learning to assess large datasets for fraud. However, according to a Business Insider, “many of the benefits were theoretical and had yet to be proven.”

Potential investors in PYPL stock should be asking themselves whether the company is chasing after hyped innovations that have few practical applications. Beyond that, a look at the chart should give conservative investors pause.

The Dangers of Decentralized Hype

As a cryptocurrency investor, when PayPal announced the layoffs, I immediately keyed in on the distributed ledgers component.

To clarify, the blockchain is a type of distributed ledger, which is a transactional network that features decentralized points of processing, validation and authentication. This contrasts with a traditional centralized ledger, which has a single (central) point of failure.

Now, the blockchain adds a decentralized economic incentivization to the basic distributed ledger whereby participants (nodes) contribute processing power to the underlying network (to promote management and operations) in exchange for a monetary reward (i.e., cryptocurrency coin or token). A risk-reward protocol is in place, such as proof of work or proof of stake, in part to maintain a trustless network without the need for centralized remediation.

What’s interesting about PayPal’s layoff is that blockchain critics have long derided the innovation as overrated, with one reason being that decentralization creates its own inefficiencies. Another factor is that distribution of controls can also lead to confusion when circumstances call for firm redress. In some ways, decentralized protocols — whether distributed ledgers or genuine blockchains — are solutions to problems that they originally produced.

I believe that PayPal’s unwillingness to pursue distributed ledger technology is telling. It’s a digital payments processor so, on paper, you’d think that decentralized protocols would be helpful for PYPL stock. Obviously, management thinks otherwise, which means it’s back to the drawing board for PayPal.

PYPL Stock Has Gone Nowhere

In February 2020 — just before the pandemic-induced market crash — PYPL stock was changing hands at over $120 per share. Shares hit a low around $82 in March of that year. In July 2021, they topped out at over $310 per share — up 278% from trough to peak.

Today, PYPL stock is trading just above the $100 level, meaning it has given back all of its pandemic-related gains, and then some. It’s puzzling that shares of one of the greatest growth stories in recent years have gone nowhere in two years, but that’s exactly what’s happened.

With PYPL stock down 47% so far this year and 15% in the past month alone, I wouldn’t be surprised to see a dead-cat bounce. However, as investors continue to prioritize value over growth amid high inflation, Federal Reserve rate hikes and geopolitical uncertainty, you can expect the dominant trajectory in PYPL stock to remain to the downside.

Only Put Speculative Cash in PYPL Stock

While PayPal’s share price may have stalled in recent years, there’s no denying the underlying business has become increasingly relevant. For instance, the expanding gig economy bodes well for convenient “untethered” business applications like PayPal. From this standpoint, aggressive investors may consider PYPL stock to be trading at a once-in-a-blue-moon discount.

However, the technicals and broader market conditions do not favor a rebound in shares. All but speculative investors should avoid PYPL stock for now.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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