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Why PayPal Investors Got Nervous on Wednesday

By Danny Vena – Oct 20, 2021 at 5:20PM

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There are reports that the digital-payments giant could be making a pricey acquisition.

What happened

Shares of PayPal (PYPL 2.16%) stumbled on Wednesday, falling as much as 6.8%, though the stock recovered a bit, ending the trading day down 4.7%. The catalyst that sent the fintech leader lower were reports that it might be expanding into new markets via a massive acquisition.

So what

Reports surfaced early in the day that PayPal had made overtures to acquire social-media site Pinterest (PINS 0.96%). Bloomberg dropped the story, citing the oft-quoted "people with knowledge of the matter," which sent Pinterest stock soaring

A smiling person in a restaurant making a digital payment with a smartphone.

Image source: Getty Images.

The report had the opposite effect on PayPal. Investors were likely concerned about the proposed acquisition price for Pinterest of roughly $70 per share.

As of Jul. 23, 2021, Pinterest had more than 555 million shares of Class A common stock outstanding and more than 89 million shares of Class B shares, which, taken together, would value Pinterest at more than $45 billion. For context, PayPal currently has a market cap of roughly $300 billion, so an acquisition of this magnitude could have a significant impact on PayPal's business -- particularly if things go south.

The report didn't specify when these discussions happened, though an updated version of the report said, "Terms of a transaction could still change, and there's no certainty the talks would lead to an agreement." 

Now what

PayPal has been looking to expand beyond its digital-payments business and has been working to become a "destination app" as a way to help users take control of their financial lives. Last month, the company added a host of new features and services, taking it one step closer to what some are calling a "super app."

The added functionality includes a high-yield savings account, in-app shopping tools, up to two-day early access to direct deposit funds, bill pay, and deals and rewards for users. In the coming quarters, PayPal plans to expand its features even more, adding investment capabilities and purchasing with cryptocurrency.

By joining forces with Pinterest, PayPal would establish a sizable beachhead in social commerce, a natural extension of its payments business.

Thus far, neither PayPal nor Pinterest has confirmed the reports.

Danny Vena owns shares of PayPal Holdings and Pinterest and has the following options: long January 2022 $85 calls on PayPal Holdings. The Motley Fool owns shares of and recommends PayPal Holdings and Pinterest. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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