PayPal Under Pressure as Wall Street Digests Potential Pinterest Acquisition

Bernstein would much rather have PayPal focus its energy on the “urgent tasks at hand,” such as Venmo monetization and offline growth.

Shares of PayPal (PYPL) are slipping in Wednesday afternoon trading following media reports saying the company has made an offer to buy Pinterest (PINS) for $45B, mostly in stock, although the final offer price and terms may still change. PayPal is reportedly hoping to successfully negotiate and announce a deal by its quarterly report on November 8. While Baird analyst Colin Sebastian believes such a combination could make strategic sense as it might help accelerate PayPal’s super app ambitions, his peer at Truist believes such a deal would make “zero sense” and would accentuate his existing concerns about the durability of PayPal’s organic revenue growth.

PINTEREST ACQUISITION: 

PayPal has made an offer to buy digital pinboard site Pinterest for $45B, or $70 per share, with the former planning to finance the acquisition mostly through stock, Reuters‘ Greg Roumeliotis reported, citing people familiar with the matter. News of the potential deal comes less than a week after Pinterest co-founder Evan Sharp announced plans to leave the company to join LoveFrom, a company led by Jony Ive, the designer of many iconic Apple (AAPL) products, the author noted. 

Ed Hammond and Liana Baker of Bloomberg, who were first to report that PayPal recently approached Pinterest about a potential takeover and the companies discussed a potential price of around $70 per share, noted that such a deal would represent about a 26% premium to Pinterest’s Tuesday closing price of $55.58. Terms of a transaction could still change, and there’s no certainty the talks will lead to an agreement, Bloomberg’s report stated. 

SUPER APP AMBITIONS: 

Following media reports suggesting that PayPal is considering an acquisition of Pinterest for about $70 per share, Baird analyst Colin Sebastian said that “at first glance” he believes such a potential combination could make strategic sense. For PayPal, there would be “clear synergies” in combining its own “bottom of the funnel” digital wallet and Honey deals platform with Pinterest’s “top of funnel” search, discovery and inspiration platform, Sebastian contended. Further, the analyst thinks Pinterest “could help PayPal accelerate its super app ambitions” and significantly increase the size of its consumer wallet base by converting Pinterest users into PayPal account holders. PayPal, however, might need to pay more than $70 per share for Pinterest, Sebastian added. The analyst has an Outperform rating and $325 price target on PayPal shares.

Acknowledging that such a deal “clearly” is “not exactly a slam dunk in the minds of the investment community” given the move lower in PayPal shares, Keefe Bruyette analyst Sanjay Sakhrani said he sees how it can make sense for the company in the context of the company’s vision of being a super app. While bears will say this might be an indication that the company is having trouble with consumer engagement, he could see a benefit of getting in earlier in the consumer’s decision-making process and potentially having influence as well. A purchase price of $70 per share with an 80%/20% mix of equity and cash could be EPS neutral prior to any integration costs and longer-term there should be opportunities for revenue synergies, Sakhrani contended. The analyst has an Outperform rating and a price target of $340 on PayPal shares.

DEAL WOULD MAKE ‘ZERO SENSE’: 

Also commenting on the news, Truist analyst Andrew Jeffrey said that such a deal would make “zero sense” and would accentuate his existing concerns about the durability of PayPal’s organic revenue growth. A combination would be “an act of near desperation” as PayPal contends with increased “Buy Button” competition, a “formidable” new Buy-Now-Pay-Later tie-up between Square (SQ) and Afterpay (AFTPF) and its own lagging Venmo monetization, Jeffrey argued. The analyst believes instead PayPal should buy a legacy merchant processor to catalyze its Venmo and in-store ambitions. Jeffrey has a Hold rating and $275 price target on PayPal shares, which are down $15.57, or 6%, to $256.13 in afternoon trading following the Pinterest reports.

In a research note to investors following the reports, Bernstein analyst Harshita Rawat said that while she can paint the dream scenario, she struggles to see “compelling synergies” and sees meaningful execution risks to “PinPay.” On the surface, this deal gets PayPal more deeply integrated into the “inspirational” top of the shopping journey – thus potentially enhancing PayPal’s checkout share as well as driving deeper value for its merchants, Rawat contends. However, she is cautious regarding this deal as the achievability of synergies requires a fair bit of execution – something that both PayPal and Pinterest have “struggled with historically.” The analyst would much rather have PayPal focus its energy on the “urgent tasks at hand” – Venmo monetization, offline growth, super app rollout and international expansion – rather than add more integration complexity. On the Pinterest side, Rawat remains cautious as well as user behavior on internet platforms is notoriously difficult to change and it’s “genuinely unclear” whether Pinterest’s 454M MAU will meaningfully shift their behavior down-funnel toward purchasing intent even assuming PayPal could drive higher merchant/product adoption.

PRICE ACTION: 

In Wednesday afternoon trading, shares of PayPal have dropped over 5% to $257.93, while Pinterest’s stock has jumped about 14% to $63.50.

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Originally Posted on October 20, 2021 – PayPal Under Pressure as Wall Street Digests Potential Pinterest Acquisition