Fintech
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PYPL $229
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PayPal's Venmo unit strikes deal with Amazon to become a payment option at checkout; we remain bullish
(08 Nov 2021) Just last month we were talking about PayPal's (PYPL $229) supposed $40 billion acquisition of Pinterest (PINS $47). While the company quickly quelled those rumors, we do believe they were actually interested in buying the social media platform. Feeling the heat from competitors such as Square (SQ $237), which recently paid $29 billion for buy now-pay later firm Afterpay, the company desperately wants to expand its fintech offerings. While that transaction never happened, the company's Venmo unit did just notch a big victory: it inked a deal with online behemoth Amazon (AMZN $3,489) to become a checkout option for customers at Amazon.com. Considering Amazon is responsible for over 40% of online purchases, that is a pretty big deal. PayPal made the announcement during its mixed-quarter earnings report. While revenues in Q3 rose from $5.46 billion to $6.18 billion year-on-year, that 13% increase fell slightly below analyst expectations. Profits, however, did beat expectations of $1.07/share, with net revenue actually jumping to $1.11/share. Shares were little changed after hours following the earnings report and the announcement. PayPal was spun off from eBay six years ago and has 377 million active accounts, including 29 million merchant accounts. For some reason, PayPal has been portrayed by many as "old school" fintech. That is simply inaccurate. It is a $270 billion fintech giant, and the leader in the secure online payment space. While we were sorry to see the Pinterest deal fail to manifest, management is not done searching for a good fit. CEO Dan Schulman will not sit idly by while new upstarts eat into his company's market share. We place a fair value on PYPL shares at $300, but investors may want to see if continued Wall Street pessimism pushes them down to the $200 range before considering a purchase. |
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PYPL $258
PINS $63 |
Why does PayPal want to buy a social media company for $40 billion?
(UPDATE: PayPal announced it is not pursuing acquisition of the firm.) (21 Oct 2021) Paypal (PYPL $258) is a $300 billion leader in the fintech movement, providing secure electronic payment solutions to some 400 million merchants and consumers. A week ago, Pinterest (PINS $63) was a $30 billion online social media platform with some 400 million monthly active users. A week later, all that has changed with Pinterest is its market cap: following rumors of a pending acquisition deal by PayPal, the company is now valued at $40 billion. What does PayPal hope to gain by offering such a high premium for the firm? The company has said it wants to grow its active user base to 750 million by 2025, and it clearly believes it can convert a large number of Pinterest users to customers ready to use its wide array of services, from online payments to lines of credit to creating a digital wallet for the purchase of crypto. For its part, Pinterest clearly wants to start monetizing its massive user base and sees the deal as a way to do just that. Right now, the firm generates all of its revenue from selling digital advertising on its platform. Pressure from competitors such as Shopify, which recently partnered with "buy now pay later" provider Affirm, has certainly been a catalyst for the move. Paying $40 billion for a social media company that went public just two years ago—when it was valued at $10 billion—may seem like a risky move, but the deal makes sense if CEO Dan Schulman and his team can create the right synergies between the two. Not everyone agrees: Morningstar placed a $147 fair value on PYPL shares and sees all of the benefit of a merger on Pinterest's side of the ledger. We don't agree with Morningstar's assessment of PayPal's fair value. In fact, we believe the shares, which dropped from $271 to $249 on news of the deal, are worth double the Morningstar value. Granted, competitors such as Affirm and Square also have "super-app" ambitions, but we believe PayPal is in the best position to make it happen. (A super-app bundles financial services along with other features, such as messaging and social media.) And the company's aggressive acquisition strategy makes it clear that they intend to remain the dominant player in the space. |