We Would Look to Buy Paypal (PYPL) on This Dip

20 Oct 2021 _ 5:00 PM EDT

First, our updated thoughts on PayPal and then we'll discuss how we feel about Nucor and some other holdings before their earnings reports.

Shares of PayPal are taking a beating in the afternoon session following reports that the fintech king could be looking to acquire Pinterest for $70 per share (or $39 billion, about 4x the latter’s valuation when it came public in April 2019). This would be by far the company's largest acquisition to date at roughly 10x that of Honey, which was purchased for over $4 billion and is currently the largest acquisition in PayPal’s history. 

The potential move (neither company would provide comment) is raising eyebrows as Pinterest has not been much a of performer prior to this news and potential synergies are bit unclear as Pinterest is not so much a fintech play as it is a mix of social media and idea generation tools that allow users to create collections of media tied to a theme, event or hobby. 

While we understand the skepticism, we believe this was a shoot-first, ask questions later reaction. It is always the case that the acquirer sees a sell-off, while the acquiree gets a boost. We would use this sell-off as an opportunity to average down our position. Even though we are currently overweight this position by about 1%, we would be willing to go further. 

Why the acquisition could work:

While Pinterest may not seem to jive with a company traditionally focused on the fintech space, we believe it may be an ideal fit for the company's ambitious new “Super App,” which management wants to build out to include much more than traditional financial services.  

When we consider what the company has already said about the new app, this move starts to make more sense. On the release, management commented, “the new PayPal app will introduce a range of new shopping tools to enable customers to discover exclusive deals, make purchases and earn rewards seamlessly within the app. Shoppers will be presented with discounts and offers on hundreds of popular brands and will be able to shop through the in-app browser.” 

The interest in Pinterest also reminds of us of the company's prior acquisition of Honey, an online shopping tool that helps consumers find deals and save money when shopping online – though we think the user engagement brought on via Pinterest would be greater. 

With this acquisition, should it materialize, we think PayPal will be able to more effectively address Facebook’s recent push into online shopping, most notably with Instagram, which is itself a photo sharing app that now allows users the ability to buy items without leaving the app. However, while Instagram is a bit more segmented — you have the photo sharing aspect and then separately the marketplace aspect, which allows users to pay via credit card or link their PayPal account — bringing Pinterest under the PayPal umbrella could make for a more seamless user experience that allows users to generate idea boards (think event planning or interior design ideas, etc.) and then purchase those items using the PayPal wallet linked to their account. While this is of course speculation, we do see many ways for management to integrate the two businesses and believe CEO Dan Schulman to be a bankable CEO that is thinking much longer-term than today’s knee-jerk sellers or arbitrage traders and will not make a value destroying acquisition. 

Bottom line: Remember, neither companies have confirmed this rumor. Should the reports prove false, we think shares bounce right back to where they were prior to the news. Should they prove true, we have believe PayPal management's track record speaks for itself and that patient shareholders will be rewarded as the company will have the opportunity to increase user engagement and monetization opportunities. 

Earnings on deck - Nucor:

Moving to Thursday morning, we’ll hear from the steel manufacturer Nucor. We aren’t anticipating any real surprises when Nucor reports because they pre-announced record third-quarter earnings last month, guiding to $7.30 to $7.40 when the consensus at the time was $6.60. Our focus tomorrow will be on management’s expectations for the fourth quarter, qualitative commentary around 2022 supply/demand dynamics, and uses of cash (buybacks vs. new mills vs. acquisitions).