Pinterest's (PINS 0.21%) stock soared nearly 13% on Oct. 20 after a Bloomberg report declared that PayPal (PYPL -0.27%) was interested in buying the social media company for about $70 per share.
The report, which cited anonymous sources, claimed the deal would value Pinterest at approximately $45 billion and represent PayPal's largest acquisition ever. A subsequent Reuters report claimed PayPal would fund most of the deal with its own stock instead of cash or debt.
This wouldn't be the first time a major tech company tried to buy Pinterest. About a year ago, Microsoft (MSFT -0.66%) reportedly tried to buy Pinterest for about $51 billion after it failed to bring TikTok's U.S. operations into the fold. Pinterest walked away from that offer, but its stock tumbled this year after its monthly active users (MAUs) dropped sequentially in the second quarter.
Image source: Pinterest.
Investors should be skeptical of these new reports about PayPal, but they should still consider the implications of the rumored bid. If PayPal and Pinterest are actually engaged in serious takeover talks, I believe investors should be concerned about the long-term futures of both companies.
PayPal's interest in Pinterest is a red flag
Back in February, PayPal declared it would more than double its annual revenue, from $21.45 billion in 2020 to over $50 billion, by 2025. It also claimed it would nearly double its number of active accounts to 750 million. However, PayPal's second-quarter report from July, which featured weaker-than-expected revenue growth and softer-than-expected revenue guidance for the third quarter, cast doubts on those ambitious growth targets.
PayPal's rumored bid for Pinterest raises additional red flags. If PayPal buys Pinterest, it would immediately add the platform's 454 million MAUs to its own ecosystem of 403 million active accounts. It would also add $2.6 billion in revenue to its top line if Pinterest hits Wall Street's estimates this year.
That acquisition could propel PayPal toward its 2025 goals, but a large portion of that growth would be inorganic. PayPal might claim Pinterest's evolution into a "social shopping" platform with its shoppable pins makes it a natural fit for its digital payment services, but Pinterest already holds a similar partnership with Shopify (SHOP 1.03%), which provides its own payment services for Pinterest-based purchases. Even if PayPal buys Pinterest, it could struggle to pull its merchants away from Shopify's e-commerce services.
PayPal could also integrate Pinterest into its new "super app," which bundles together mobile messages, peer-to-peer payments, digital wallet services, bill payment tools, direct deposits, cryptocurrency purchases, BNPL (buy now, pay later) options, shopping tools, and other financial services.
That integration could widen PayPal's moat against Square (SQ 0.51%), which recently integrated its payment platform with TikTok. However, we don't know if PayPal's users actually want to browse through Pinterest feeds, or if Pinterest-based businesses want to be locked into PayPal's walled garden -- especially if they can have more freedom by sticking with Shopify.
Pinterest could be desperate for a takeover
Pinterest's stock declined this year because its second-quarter MAUs fell sequentially from both the first quarter and the fourth quarter of 2020.
Pinterest blamed that slowdown on reopening trends, and admitted its user growth had spiked throughout the pandemic as more people stayed at home and searched for hobbies, projects, and cooking ideas on its pinboards. It also warned that the slowdown would persist into the the third quarter.
Many of Pinterest's other metrics, including its average revenue per user (ARPU) and its profits, have been improving. It's also been mainly losing desktop users, which are harder to monetize, instead of higher-growth mobile users. Nonetheless, Pinterest's future still looks hazy, because we still can't tell if its slowdown is temporary or the start of a prolonged decline.
The recent departures of Pinterest's chief accounting officer Lily Yang and Evan Sharp, the company's co-founder, board member, and chief creative and design officer, sparked even more concerns. Pinterest's insiders have also sold more shares than they bought over the past 12 months.
Therefore, Pinterest's rumored interest in PayPal's bid suggests its third-quarter numbers could be much worse than expected. Pinterest's stock isn't cheap at about 40 times forward earnings and 15 times this year's sales right now, so it might seem smarter for the company to accept PayPal's offer.
Not great news for either company
PayPal might have other reasons for going after Pinterest, but the rumored bid seems like a clear sign of weakness for both companies. It indicates that PayPal might struggle to hit its 2025 targets on its own, and that Pinterest's slowdown could drag on long after the pandemic ends.
