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Here's how PayPal could cash in on its potential acquisition of Pinterest

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Ygal Arounian, Wedbush Securities VP of Equity Research, discusses recent reports that PayPal is in late talks to acquire Pinterest in a $45B deal.

Video Transcript

AKIKO FUJITA: Shares of PayPal and Pinterest both sliding lower in this session on news that PayPal is looking to delve a little further into the e-commerce space. The digital payments company reportedly looking to buy Pinterest at $70 a share, a deal that could be valued at $45 billion. Let's bring in Ygal Arounian. He is Wedbush Securities VP of Equity Research. Ygal, good to talk to you today. $70 a share. We just saw Pinterest is trading at $60 a share, so it would be a significant premium from where it's trading today. Is this a deal that makes sense to you at this price point?

YGAL AROUNIAN: Yeah, it does at this price point. Look, the deal, to us, is very forward-looking. And I think when you look at Paypal's stock reaction over the past couple of days, I think PayPal investors and shareholders are probably looking at this and thinking, there aren't a lot of kind of immediate synergies, right? It's not a payments company per se.

But PayPal is really trying to build something larger, what a lot of people call kind of a super app. And what Pinterest brings to the table for a payments company is a digital advertising platform that's really focused around commerce.

And what we're seeing is that social commerce, the ability to buy something directly from a platform like a Pinterest or like Instagram, that's a really growing-- a fast growing trend. And it's something that Facebook and Pinterest and other social media platforms have really been very much focused on, bringing that transaction onto the platform. And to us, that's what this is all about. It's about tying together the social media transaction to the payments part of the business.

ZACK GUZMAN: Yeah, I mean, it seems like analysts are really torn on this, when there were some that were absolutely destroying the idea of PayPal ever wanting to come in and pay to acquire Pinterest. But I mean, when you do think about the social aspect, that is one thing that stands out for Pinterest. It's always more of a platform where people go to make conscious decisions and maybe seek out certain products, or at least, styles, versus the traditional social media route of Facebook and Twitter, where you have everything in ads thrown in there that aren't necessarily in the shopping experience.

When you look at the performance of Pinterest, though, US monthly active users were actually down in Q2. So that was pretty alarming. We've seen the stock get hit pretty hard over the last few quarters. I mean, I guess, who's the winner here if this deal is to go through? Because Pinterest seems like it's been lagging. Why would PayPal want to come in and take a company like that over?

YGAL AROUNIAN: Well, there's-- well, first of all, I understand why this is a little bit controversial because, again, it's a little bit out of the box. It's not your typical-- it's not a payments company buying another payments related company. So you need to be a little creative with how you think about it. But I do, again, really think it's a very forward looking type of acquisition.

Pinterest's engagement and user story is a little bit different than most other social media companies. And yeah, its users have declined over the past couple of quarters. That's been a big red flag. It's a big part of why the stock's fallen. It was close to $100, and it's been as low as $50. You know, during the heart of the pandemic-- you know, we were just talking about that in the previous segment as well. There, in the heart of the pandemic, everyone was stuck at home.

The Pinterest use case really picked up, right? People were looking for inspiration around recipes because they were cooking more, around home design because they were spending more time in the house. So they saw a kind of big spike in users. And now, they've given most of that back. They've actually given all of it back or back at pre-pandemic levels of users domestically. International is still kind of earlier stage, and those numbers continue to go up. But, you know, collectively, on a global basis, we've got over 400 million users. You know, that itself is powerful.

And people do spend less time on Pinterest. Engagement is lower than typical social media. What the advantage for Pinterest is that the way people use it is completely different than how they use other social media platforms. The intent is much higher. People are going there to discover products and to get inspiration and ideas for things like recipes and home design.

And the power for an advertiser because of that user intent is really much, much greater. And there's a lot of potential. Pinterest is still just 1% of total global digital ad dollars in the US as well. And they've got a lot of things cooking around, bringing that social commerce aspect onto the platform in a greater way. And there's a lot of opportunity upside in the long-term if they can really put all these pieces together.

AKIKO FUJITA: Ygal, how supportive do you think this transaction, again, if it goes through, is likely to be for PayPal stock? I mean, we're seeing it down about 5% right now, $245 a share. Still well off of what we saw in July, for example, at more than $300. Medium term, how big of a lift or how big of a catalyst could a transaction like this be for PayPal?

YGAL AROUNIAN: So I don't cover PayPal. Another analyst at the firm does. But I think if you do the math, it is accretive to Paypal's numbers pretty much from the beginning, if not pretty early on. So, just from a pure numbers standpoint, it should be accretive to the numbers.

In terms of synergies and how they build it together and how that kind of super app and, you know, how the payment side comes together with the social media and the digital advertising side, you know, again, it's not so straightforward, so it could take some time for those synergies to come together. But even in the near term, it should be accretive to numbers. And then you build in some synergies over time. And you could have something that's pretty unique in the medium to longer term.

ZACK GUZMAN: Yeah, and lastly, before we let you go, we were talking in the break about the price action we saw, the improvements clearly not at that $70 price point that's been reported here. So I guess, some investors out there not thinking this is going to go through. But there could be an outside bidder, too, who might scoop in here at the last minute and say, no, no, we want Pinterest more than you do, PayPal. So I mean, do you see 70 being about fair for where an acquisition could come through? Or do you-- what might happen if you do see a bidding war come through? Because Pinterest is, as you're talking about, different than everything else out there.

YGAL AROUNIAN: Yeah, I think it's a very attractive take-out multiple. It's about 13 times next year's revenue. Pinterest's profitability has scaled up quite materially. The top line revenue was up 50% this year. The consensus growth for the next couple of years is about 30%. And I think there's upside to that. So, again, it's a unique platform.

You know, you've had some issues around user growth, sure, over the past couple of quarters. I think that's been a little bit more reopening driven. The user growth story will follow. I think it's a big monetization story. And I think there's a lot of runway for growth. There's a lot of runway for margin expansion. And you're paying a pretty good, a pretty attractive multiple. And I think there could be others that might come in and be interested at that price point.

AKIKO FUJITA: We'll see if it comes to that. Ygal Arounian, Wedbush Securities VP of Equity Research, appreciate you joining us today.