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PayPal stock rose sharply in premarket trading after Reuters reported that Stripe and Advent International were considering a joint bid for the payments company.
Advent and Stripe are Considering Buying PayPal
Stripe, a popular fintech company, has teamed up with Advent International, a private equity company, to acquire PayPal. According to Reuters, the two firms are pitching a bid worth $53 billion. That’s higher than the $42 billion it ended the day on Tuesday.
If the deal is confirmed and if PayPal acquires it, it will mark a significant downfall for one of the most prominent fintech companies. While $53 billion is a big number, the company was valued at over $340 billion during the pandemic.
A PayPal buyout would make sense for several reasons. It is one of the most popular fintech names with over 430 million customers globally.
Additionally, an acquirer would be buying one of the cheapest firms on Wall Street. Seeking Alpha data shows that the company has a forward price-to-earnings (P/E) ratio of 8.9. This simply means that, assuming it gets no growth, a potential buyer would break even in less than a decade.
In contrast, the S&P 500 Index has a forward P/E ratio of 20. Other fintech companies like Visa, Mastercard, Robinhood, SoFi, and Marqeta have a higher multiple than that.
Additionally, while its growth has slowed, PayPal is still a highly profitable company with a net income margin of 15. This means that a potential acquirer will be in a position to improve this profitability over time.
There are other ways of improving PayPal’s business. For example, a potential acquirer may decide to break it apart by spinning off its Venmo brand, which has over 100 million users.
PayPal’s Stock Growth Has Stalled Recently
The main reason why PayPal stock has crashed over time is that its business has become highly competitive. Its branded solution continues to face competition from wallets like Google Pay and Apple Pay.
On the other hand, its unbranded business is competing with companies like Stripe and BNPL brands like Affirm and Klarna. As a result, its revenue growth has continued to dwindle. For example, the most recent results showed that its revenue rose modestly by 7% in the first quarter to $8.4 billion.
Its operating income dropped by 3% to $1.5 billion. In contrast, the S&P 500 Index had an average earnings growth of over 20%. At its peak, the company was experiencing double-digit growth.
Analysts don’t expect much growth in the coming years, even with the new CEO, Enrique Lores. The average revenue growth is expected to be $8.47 billion, up by 2.2%. The annual revenue growth rate is expected to be 3.5% to $34.33 billion.
This article is for informational purposes only and should not be considered financial or investment advice. Reports of potential mergers and acquisitions may not result in a completed transaction, and equity markets can react sharply to new developments. Readers should conduct their own research and consider their financial circumstances before making investment decisions.
What Next For PayPal Stock?
PayPal stock is soaring because the acquisition price is higher than its closing price on Tuesday.
Looking ahead, there will be some potential scenarios. First, Stripe and Advent may confirm or deny the reporting of a deal. A confirmation would be bullish for PYPL shares. Earlier this year, Stripe denied reports that it was considering buying PayPal.
Second, PayPal may decide to reject the offer, which would likely drag its stock lower. In this case, the management may commit to remaining as an independent company, arguing that it has the potential to engineer a turnaround.
Third, the firm may push the acquirers to increase the purchase price. This is exactly what Warner Bros. Discovery did. In the end, its acquisition price was $111 billion, higher than what Paramount and Netflix had proposed.
Additionally, PayPal may decide to entertain more offers from other companies. Such a move would push the stock significantly higher.
