PayPal's rocky road ahead warrants more cost cuts, Wall Street says

(Reuters) - PayPal Holdings Inc will need to cut more costs with its payment volumes expected to shrink as customers batten down the hatches to prepare for a potential economic downturn, said Wall Street analysts, warning of a tough year ahead.

The San Jose, California-based digital payments company said on Tuesday it would lay off 7% of its workforce, or around 2,000 employees, a move in line with analyst expectations and the firm's previous commitment to rein in costs.

PayPal has been under pressure for most of last year, as surging inflation and fears of a recession limited digital payments and e-commerce spending.

"Improving margins has increasingly been a focus for management over the past year, possibly in part due to pressure from activist Elliott Investment Management, and this looks like another step in that direction," Morningstar analyst Brett Horn said.

Some analysts suspect the latest job cuts were under pressure from Elliot, which took a stake in the company in August.

PayPal still has potential to "meaningfully improve margins over time," Horn added, indicating the company has further room to cut costs.

The company cut its annual revenue growth forecast when it reported its third-quarter results in November.

As demand continues to soften, there is little reason for investors to be bullish on PayPal's growth in the medium term, Jefferies analysts said in a note.

Shares of the company dipped 0.3% in premarket trading on Wednesday.

(Reporting by Niket Nishant in Bengaluru; Editing by Shinjini Ganguli)