Back in October 2021, PayPal (PYPL 2.90%) reportedly considered buying Pinterest (PINS 4.04%) for as much as $45 billion. That rumor initially surprised many investors, because the two companies seemed completely different: PayPal was one of the world's largest digital payment companies, while Pinterest was a niche social media platform that let its users share their interests, hobbies, and ideas through virtual pinboards.
Yet the potential synergies between PayPal and Pinterest were also easy to spot. Pinterest had already been expanding into the "social commerce" market with its shoppable pins, so PayPal could tether those merchants to its digital payments services. Gaining hundreds of millions of active users from Pinterest could also solve PayPal's problem of slowing user growth.
Image source: PayPal.
However, those talks fizzled out and both stocks subsequently declined. Ever since it shot down those takeover rumors on Oct. 26, 2021, PayPal's stock has declined about 70% as Pinterest's stock tumbled 40%. Let's see if either stock is worth buying after those steep declines -- and if the two companies might revisit the idea of an acquisition in the future.
What happened to PayPal?
Back in 2018, eBay unexpectedly announced it would transition all of its merchants' digital payments from PayPal to the smaller Dutch fintech company Adyen over the following five years. That decoupling, which ends this year, curbed PayPal's growth and indicated it was still vulnerable to its smaller competitors.
The pandemic temporarily masked that slowdown by driving more consumers toward online purchases and digital payments. Those tailwinds caused PayPal's revenue to rise 21% in 2020, compared to its 15% growth in 2019.
PayPal initially expected that momentum to continue. During its investor day presentation in early 2021, it declared it could nearly double its number of active accounts to 750 million while more than doubling its annual revenue by 2025. Unfortunately, its slowdown as the pandemic eased -- which was exacerbated by rising inflation and the final stages of its decoupling from eBay -- caused it to hastily abandon those ambitious targets last year.
PayPal's revenue only rose 18% in 2021 and 8% in 2022, and its number of active accounts only reached 433 million at the end of the first quarter of 2023. CEO Dan Schulman also announced that he would step down by the end of the year.
But as PayPal's growth cools off, it's cutting costs and buying back more shares to boost its earnings per share (EPS). That's why analysts expect its revenue to only rise 8% this year but for its EPS to grow 20%. Based on those estimates, PayPal's stock still looks dirt cheap relative to those of most of its fintech peers at just 13 times forward earnings.
What happened to Pinterest?
Pinterest's growth accelerated significantly during the pandemic as people stayed at home and searched for online shopping ideas, recipes, DIY projects, and family activities on its pinboards. Its revenue soared 48% in 2020 and its monthly active users (MAUs) hit a peak of 478 million in the first quarter of 2021.
But like PayPal, Pinterest suffered a slowdown as the pandemic eased and people spent less time at home. The macro headwinds exacerbated that pain by squeezing its core advertising business and causing fewer people to shop online.
Pinterest's revenue rose 52% in 2021, but it lost its momentum throughout the second half of the year. Its revenue grew just 9% in 2022, and it ended the first quarter of 2023 with only 463 million MAUs.
But on the bright side, Pinterest's MAUs actually increased sequentially over the past three quarters, while its new deal with Amazon -- which will integrate the e-commerce giant's ads into its pinboards -- could accelerate its transformation into a social shopping platform.
Pinterest has also been cutting costs as its revenue growth cools off. For now, analysts expect its revenue and earnings to grow 7% and 28%, respectively, this year as it gradually stabilizes its business in this tougher macro environment. Based on those expectations, Pinterest still looks a lot pricier than PayPal at 36 times forward earnings.
Could PayPal still try to buy Pinterest?
Pinterest only has a market cap of $18 billion today, so investors might be wondering if PayPal might approach the company again with another offer. But I think that's unlikely to happen in light of the events over the past year. PayPal ended its latest quarter with $7.1 billion in cash and equivalents and $3.6 billion in short-term investments, so it will either need to cover the deal with stock or take on more debt. The former would contradict its current strategy of buybacks, while the latter would be challenging in a high-interest-rate environment. Pinterest's existing partnerships with Shopify and Amazon would also make it unlikely for PayPal to secure exclusive payment privileges on the platform with a takeover.
But on a stand-alone basis, PayPal is still a better investment than Pinterest right now for three simple reasons: Its business is bigger, it's more broadly diversified, and its stock is cheaper. It probably won't blast off anytime soon, but it's still a well-rounded play on the secular expansion of the digital payments market.
