PayPal (PYPL) stock plunged rather violently last week when news broke that the fintech giant was in the late stages to acquire social-media company Pinterest (PINS).
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The deal fell through in a hurry, and there was a bit of relief in PYPL stock, as it announced it has no plans to acquire Pinterest anytime soon. Still, PayPal stock didn’t end up recouping all of the ground lost since the initial news that showed the company’s interest in Pinterest.
Undoubtedly, investors seem to be punishing PayPal for its intent to pursue a lofty social-media acquisition at a time where there’s a bit of froth on the broader markets. Indeed, paying up a premium on top of an already hefty price tag can be the formula for significant value destruction.
The recent negative reaction shows that many investors are just digging for reasons to ditch their PYPL shares. Despite the negative overreaction, I remain bullish on PYPL over the long term.
Is PayPal Looking to Make a Lofty Acquisition?
PayPal’s willingness to pursue deals in this type of environment alone may be enough for investors to take profits in the fintech giant. Shares of PYPL are picking up negative momentum, now down around 24% from its summer peak just north of $300.
Salesforce (CRM), a cloud giant that’s done more than its fair share of M&A over the years, has been clobbered severely any time it made a deal. Salesforce CEO Marc Benioff is a brilliant mind in Silicon Valley. Despite his track record of creating value out of seemingly expensive tech acquisitions, investors seemed more than willing to ditch their CRM shares when the firm scooped up Slack Technologies.
Today, CRM stock has moved on from the acquisition that investors didn’t like from the get-go. Looking back, it’s clear that investors should have given Benioff and his team some slack.
One also has to think that CRM stock has a bit of a discount priced in, as investors anticipate further M&A from a firm that’s built quite a reputation for being a serial acquirer. If Benioff were to say he’s done with big-league deal-making for the time being, CRM stock would probably bounce considerably.
Unlike Slack under the Salesforce umbrella, Pinterest under PayPal made less sense upfront.
Indeed, social commerce could be a major trend moving forward. Still, the nascent market may not be value-creative over the near term. Moreover, such a deal and a lofty multiple would have come with considerable integration risks, especially since social media doesn’t lie within PayPal’s circle of expertise. Although, having Pinterest’s brilliant managers on board would have been nice if PayPal was keen to expand into a new market.
In any case, investors shouldn’t punish PayPal solely for its prior interest in Pinterest or any other M&A opportunities.
Yes, valuations are steep here. However, PayPal’s management has seen the reaction from investors, and it’s loud and clear that investors will punish any acquisitions with lofty multiples, especially out-of-the-ordinary acquisitions to gain a leg up in new market verticals.
Wall Street’s Take
According to TipRanks’ consensus rating, PYPL stock comes in as a Strong Buy. Out of 16 analyst ratings, there are 14 Buys and two Holds assigned in the past three months. The average PayPal price target of $333 implies 40.4% upside.
Analyst price targets range from a low of $280.00 per share to a high of $375.00 per share.
Disclosure: Joey Frenette owned shares of Salesforce at the time of publication.
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