The Ratings Game: Why PayPal may be considering a mega-deal for Pinterest

PayPal Holdings Inc.’s quest to become a “super-app” may be kicking into a new gear following reports that the company has held acquisition talks with Pinterest Inc.

The financial-technology company has been expanding beyond payments and into other areas of financial services and commerce, driven by a revamp of its app to emphasize features like crypto purchasing and savings accounts, as well as recent acquisitions, including of the deals platform Honey.

The goal is to become a “super-app” similar to apps like WeChat and Alipay, which have become dominant in Asia by bundling financial services along with features like messaging, social media, and food delivery. PayPal

isn’t the only fintech company with super-app aims—Affirm Holdings Inc.

has expressly stated its ambitions here, and Square Inc.

has been beefing up its business through acquisitions—but so far the parties don’t seem to be branching too far outside of financial services and commerce, unlike the Chinese trailblazers.

A possible deal for Pinterest
which was first reported Wednesday by Bloomberg News, could give PayPal more opportunities to expand, analysts say, into areas like social media and advertising.

“The key value proposition for PayPal would be to have an anchor in internet and/or e-commerce and social media, which helps diversify away from standard online checkout,” Mizuho’s Dan Dolev wrote. “Down the road, PayPal could potentially add more shopping capabilities, and boost its e-commerce presence, potentially competing with other large online retailers like Amazon

or Shopify

Pinterest shares are up 13.2% in Wednesday afternoon trading following the report, while PayPal’s stock is down 4.8%.

For the most part, analysts seemed more enthusiastic about the potential combination than PayPal investors were, with Barclays’ Ramsey El-Assal noting that, through the purchase of Pinterest, PayPal could get its merchants to move their catalogs onto that platform as a means of reaching new customers. PayPal could also use Pinterest’s “high-traffic shopping tools” to attract new merchants, he said.

The move would be a “big swing” for PayPal, he wrote, moving the company more deeply into advertising. Payments and advertising are “better together,” in his view, “given rich transaction data that illuminates consumer preferences and habits.”

Baird’s Colin Sebastian wrote that such a deal “could make strategic sense” as Pinterest has hundreds of millions of monthly users looking for products and contemplating purchases. This represents “a massive source of value (and data) that PayPal could use to enhance both consumer and merchant services, and to remove friction from the buying experience,” he wrote in a note to clients.

Bloomberg reported that the companies have discussed a possible takeout price of $70 a share for Pinterest, though Sebastian suggested that PayPal might have to pay more than that. Even with Wednesday’s rally, Pinterest shares are down 12% since the company fell far short of user-growth expectations with its last earnings report in July. Accordingly, the stock’s valuation after that selloff likely doesn’t take into account “the significant opportunity of the platform to expand monetization in both the core U.S. and international markets,” Sebastian wrote.

Barclays’ El-Assal commented that a deal for Pinterest would be the biggest one that PayPal has attempted in its history and “would necessitate a different mix of funding than just cash on hand, as has been the case for previous acquisitions.”

Though many analysts see strategic positives in a potential combination, Mizuho’s Dolev called his view more “mixed.” Pinterest’s user growth has decelerated recently, prompting questions about whether the company can recapture momentum from the height of the pandemic, when people were largely confined to their homes and looking for inspiration online. He also wonders if PayPal’s interest in a deal says anything about the company’s confidence in its ability to hit its own user-growth targets organically.

Bernstein’s Harshita Rawat and Mark Shmulik were more negative in a note titled “Why PinPay is a match NOT made in heaven.” They don’t see “compelling synergies” in a deal and worry that PayPal would face “meaningful execution risks” by combining.

“User behavior on internet platforms is notoriously difficult to change – it’s genuinely unclear whether Pinterest’s 454 million monthly active users will meaningfully shift their behavior down-funnel towards purchasing intent even assuming PayPal could drive higher merchant/product adoption,” they wrote.

Further, PayPal’s track record on deals has been “very mixed,” in their view as they argued that the company’s acquisition of point-of-sale maker iZettle “took almost three years from close to product launch in the U.S.” They’d prefer for PayPal to tackle the big opportunities already ahead of it, including monetizing the Venmo platform and growing its offline business.

Representatives from PayPal and Pinterest didn’t provide comment to MarketWatch.

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