A PayPal-Pinterest Debrief

Tesla (TSLA 0.76%) raises the price of certain models and strikes a $4.2 billion deal with Hertz. Wells Fargo (WFC 0.05%) gets ready to roll out a new virtual assistant named "Fargo." Motley Fool analyst Asit Sharma analyzes those stories and shares why he thinks mini candy bars are underrated at Halloween.

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This video was recorded on Oct. 25, 2021.

Chris Hill: It's Monday, October 25th. Welcome to Market Foolery. I'm Chris Hill. With me today, Mr. Asit Sharma. Thanks for being here.

Asit Sharma: Chris, thanks as always for having me. Excited to be with you today.

Chris Hill: We've got the latest in banking innovation, we've got Tesla's new high. We're going to start with the unraveling of last week's big deal. PayPal (PYPL 1.39%) issued a statement saying the company is "Not pursuing an acquisition of Pinterest (PINS 0.67%) at this time." This is in response to reports last week that PayPal was preparing to spend up to $45 billion to buy Pinterest. The deal is now off and shares are reacting accordingly, I would say. PayPal up about five percent, Pinterest down about 13 percent. Where do you want to start with is? Because we were talking right before we started recording here, there are a bunch of different ways we could go, but where do you want to start?

Asit Sharma: I want to start Chris, with the idea that PayPal might have had an interest in Pinterest. Stock was initially down when the potential of a deal was announced, not announced but leaked out last week. PayPal stock is up today. Shareholders are obviously relieved. I think I'm in the minority because I actually believe the deal would have had some potential. PayPal has very quietly added another layer to its stock. They started with payments and payments processing few years ago. They added in financial services like debit cards, direct deposit, buy now pay later of course. Of course, they have the merchant services end, which focuses on helping merchants get the most out of their business. But they added on shopping tools and marketing tools. They've done this over the last few quarters. Now, they've got things like Droplets, which is a technology that sends you an email if you like something online but the price is too high. That technology lets you know when it might be time to buy. On the marketing tools side, they have what they call Deals Engine to help merchants really try to find customers and convert them in the shopping cart. Especially significant is investment in Honey, the e-couponing add-on for different browsers, which helps you find the best price or the best coupon to get a deal. All this technology which the company is still investing in, leads to a really powerful way to make sure that buyers are going to ultimately convert when they hit a site. 

Pinterest's website is set up to benefit from this technology. It takes you from a page on the site all the way through to the advertisers part where they are going to try to convert you. I thought that PayPal was really well suited for this. I saw some great potential. It doesn't make sense on a first glance. But when you start thinking about how the company wants to be the super app, it begins to make more sense. Now, on Pinterest's side, I know this has been discussed a lot and Chris, you've recently talked about this last week. I think this is good for Pinterest shareholders because a PayPal acquisition would have taken their potential to grow out of the hands of public investors and the ability to reap rewards from that. But they are at a crossroad. Co-founder Evan Sharp recently announced his departure from the company. Also this last earnings report that we had from Pinterest showed some slowdown from a really great COVID pull. They too are here at this liminal space where if you're a shareholder, you're happy maybe today that the deal isn't going to go through, but you're wondering, what now? When are we going to pick up some momentum guys for the stock price to reflect some business momentum?

Chris Hill: I like the way you framed it with Pinterest being at a crossroad because I think you're absolutely right. This is a business that early on, there were legitimate questions, particularly from the marketing industry, from people, media directors who control advertising budgets. They are looking at Pinterest saying, well, why would I spend money on this platform as opposed to other known quantities like radio, television, online, Facebook, Google, all that thing. Pinterest methodically answered those questions over the years. But they're at a crossroads, I would say maybe five years ago in trying to convince the marketing industry that this was a good place to spend their money. As you said, they are at another crossroad now. I think that Dan Schulman who runs PayPal has so much credibility in part because of the acquisitions he's made over the years. I think that's why PayPal shares only dropped to the degree that, they did drop last week. But I think if it was someone else, if there was a new CEO, it was not someone with Dan Schulman's track record. I think PayPal shares would've been down twice as much as they were. As you said, I think what we're seeing at least when it comes PayPal some measure of relief. It's like look, Dan, you've done such an amazing job for so many reasons, including the acquisitions, $45 billion is a lot of money and we're happy that you're not pursuing this acquisition at this time.

Asit Sharma: Exactly. Now Dan, if you bring us a $22 billion acquisition, we won't even blink.

Chris Hill: Right.

Asit Sharma: I totally agree with you, Chris. If listeners are interested, this is a great exercise. You can find us online on PayPal's Investor Relations website. Go back to their February 2021 investor presentation. There's a video where Dan Schulman lays out the vision for the next several years. It's a great half an hour, well worth the time spent if you own shares. But the vision he lays out shows you that there are a number of companies PayPal could acquire on its way to becoming a super app. This may not be the last big news of a potential acquisition that we hear. You're so right, from investing in MercadoLibre to buying so many small companies that really helped that engine grow. I mentioned Honey is just one of those. They have a great track record of capital allocations. I think investors would have given the company a pass, but relief is probably the flavor of the day today.

Chris Hill: Last thing before we move on. Shares of Pinterest, as of right now, are about 12 percent lower than they were before reports of the deal. They spiked last week on reports of the deal. They haven't returned to where they were. They've gone lower. Do you look at Pinterest even though they're at a crossroads, do you look at it now and think you could do a lot worse if you're looking for an entry point?

Asit Sharma: Sure. Pinterest has such a huge platform. It's got actually a much bigger global user base than PayPal does in terms of its customers. I believe that Pinterest is starting to look really attractive here. They monetize their international users at a fraction of how they monetize North American users. There is a lot of wide space for this company to grow. The road obviously it's going to be a bit bumpy here. I think we'll still have some post COVID effects in our next earnings report. But it's starting to look attractive for that reason. Now, by traditional valuation metrics, does it still look pricey? Yes, but you're getting a discount here for a company that easily will be a vibrant platform business over the next 3-5 years. It's worth considering it at these prices in my opinion.

Chris Hill: Shares of Tesla are hitting a new all-time high this morning after the company raised prices on certain models, certain versions, I should say, of the Model X and the Model S. Separately, Hertz is reportedly going to pay $4.2 billion for 100,000 Tesla vehicles to add to the Hertz fleet. We always like to see pricing power with businesses, but it seems like the Hertz news is doing the heavy lifting on the stock today.

Asit Sharma: I think it's another angle into the demand for Tesla's vehicles that such a big global rental car business sees this as a marque vehicle to add to their lineup. Yeah, I think that's pushing stock price today. But I do think the price raise of these models, it's something that investors are really mulling over. We've got the Model 3 and Model Y. Both are being priced upwards of $2,000 more. When you take that into context of a $44,000 price tag and a $57,000 price tag respectively, it's not a lot, but it's plenty of margin, more margin for Tesla. As you mentioned, the Model S and Model X, which are higher-end vehicles, they're each going up about five percent. Or send. What this means to me is that we are still seeing component shortages and supply issues with Tesla, they are taking a bit of opportunistic advantage here of the fact that there's a bunch of demand. There is rising tide demand and their supply is limited. Now, we saw them rewrite some software code on their chips and be able to adapt last quarter, which was great, but the thing that stands out to me, Chris, is that they had a higher profitability level on their operating margin, even as they were selling lower priced vehicles. Their business mix tilted toward their lower-end models, their operating margin climbed, so lower selling prices, but higher operating margins. 

As we mentioned in their shareholder letter, that means that they cut cost at a faster rate than the selling mix shifted. This shows you the power of Tesla's manufacturing operations. I'm neither a Tesla bull nor Tesla bear, but I can certainly see the writing on the wall that those who forever said, Tesla doesn't know how to manufacture models at scale and they're going to suffer when they have to compete against the big auto giants as they grow. That really hasn't materialized, in fact, they're showing they're more efficient in many respects than their bigger peers. That pricing power is very powerful, this quarter alone, they generated free cash flow of $1.3 billion. I think this says so many things, but most of all, it is a testament to the company's manufacturing prowess.

Chris Hill: Wells Fargo is developing a virtual assistant to help us convert more retail banking customers into digital users. Their app is being designed to help with paying bills, spending money, offering budgeting advice, and all of that is fine, but as far as I'm concerned, the most intriguing part of this app being developed by Wells Fargo, is that the name on the app of this virtual assistant is Fargo. You and I are in addition to being investors, we're also moving event, we both had the same thought, which is the movie Fargo. Is this a mistake that Wells Fargo is making or is this a golden opportunity that has fallen into their lap?

Asit Sharma: I'm going to give this a thumbs down on the movie scale, of course, this is a company that has had so many inflicted PR wounds over the last several years. Now, here you've got a marketing opportunity. You've had a new technology that you can market to the investment community and the customers, and you name it of all things, Fargo? Why not simply Wells? Why not name the virtual assistant, Wells? I think Fargo has great connotations for some people, but this was pretty macabre film wasn't it Chris? The famous Coen brothers film, Joel and Ethan Coen? This is not a walk in the park, this is a very bloody crime movie.

Chris Hill: The wood chipper's scene at the end. I think for anyone who's seen the movie Fargo, that's going to stick in your brain for the rest of your life.

Asit Sharma: Spoiler alert. [laughs]

Chris Hill: But on the flip side, the whole concept of "Midwest, nice", you think about Frances McDormand as Marge the sheriff, she's just so nice throughout the whole film and Bill Macy. I don't know, I think at a minimum, Wells Fargo needs to consider throwing some money at those two. Just to do some sort of promotion, maybe they do a little bit of voice work for the app, or a commercial, or something like that. With that phenomenon, Minnesota accent. I don't know, maybe like any accent, the Minnesota accent gets tiring over time, I have no idea, but I'd like to speak this into existence. I would like Wells Fargo to at least to some guerilla marketing campaign with Frances McDormand and William H. Macy.

Asit Sharma: If they do that, Chris, I will definitely change my opinion and give this on second viewing a thumbs-up. You're right, that Minnesota accent, very deadpan, so trustworthy, correct? From that perspective, if the virtual assistant ever has an audible voice, a voice, you can listen to. If they go with that and have some of these promos maybe throw in Steve Buscemi [laughs] in that cast, I think, yeah, I get this, but with Wells Fargo's recent history of basically defrauding customers. One wonders, if you're going to end up in the wood chipper, if you use their services?

Chris Hill: Metaphorically speaking, of course.

Asit Sharma: Metaphorically speaking, so we will see how they actually market this app. I'm not [laughs] impressed at first glance.

Chris Hill: Last thing before I let you go, it's Halloween week, as we do every year, I need your overrated and underrated Halloween candies.

Asit Sharma: Overrated, and I apologize to purists who know the long history of this candy and how it represents our harvest season, and how it is embedded in our agricultural roots going back to the 19th century, but I hate candy corn, my god, Chris. For those of you who haven't seen candy corn, there may be a few listeners today or maybe you've recently moved to the US, this is a small candy. It's pyramid-shaped, it's tri-colored, representing the colors of the harvest, but it's got this saccharin millie texture, which is brittle when you bite into it. I have never been able to get used to this taste, maybe as a kid, I liked it on a first try, but apparently, Brach's and other candy manufacturers sell billions of pieces of candy corn in just a few months during the Halloween season. It is ubiquitous on the Halloween scene, but I hate it.

Chris Hill: I don't think you're going to get a ton of push back on this one, there are always some people, and look if history is any guide, the dozens of listeners getting very fired up about their candy choices. All ready, Ron Gross has gotten a lot of blowback for his comments about KitKat, but he's also got people rallying to his cause as well. What are you going for underrated?

Asit Sharma: Underrated. I like any major candy bar in the miniature wrapper that you get, it's about the size of your thumb, so you get maybe a quarter of a traditional candy bar. My go-to's are Three Musketeers, Snickers bar, Milky Way. Chris, I might have purchased one candy bar in the last five years in the grocery aisles while I'm checking out. Let's not include Hershey's candy bar, they're chocolate bar because I associate that with making s'mores.

Chris Hill: Sure.

Asit Sharma: I've bought some of those, but as far as buying it like a Baby Ruth, maybe one in the last five years. But every Halloween without fail while we're waiting for kids to come to the house, I'll start munching, reflecting on my week, my life. I probably steal 3-5 of those before the kids even come, and if there are any leftover, I will nosh on those for a couple of days afterward. I think this is a great snack. It's a feel-good, pick-me-up, guilt-free way to participate in Halloween. I think it's underrated, I think more people should offer these. Kids in my neighborhood, I have plenty this year, don't worry. This year I'm buying for you guys and for me.

Chris Hill: That's a contrarian stance because there are definitely people who despise the notion of the "fun size bars", and just push back on that, but I'm with you. I don't remember the last time I bought and consumed an entire candy bar, but the mini ones, the fun size, I'll go to town on those like an animal.

Asit Sharma: Just last word for those who don't like to fun size, remember, they're usually sold in a bag. You can [laughs] treat yourself, spill that bag on your kitchen table, sit there with your favorite music on, a glass of soda water, and start unwrapping one-by-one, don't let that stop you.

Chris Hill: [laughs] Asit Sharma, thanks for being here.

Asit Sharma: Thanks, Chris, this is a blast.

Chris Hill: As always, people on the program may have interest in the stocks they talked about on The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery, the show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening, we'll see you tomorrow.