The share price of Pinterest (NYSE:PINS) erupted last Wednesday. After a fairly lacklustre performance throughout the year, the stock popped by double-digits. This recent momentum has helped reverse some of the poor performance, and now its 12-month return stands at around 10%. So, what happened? And should I be considering this business for my portfolio?
Share price surges on acquisition rumours
Last week, Bloomberg published an article that revealed payments processing giant PayPal (NASDAQ:PYPL) is in late-stage talks to acquire the social media platform. The deal values Pinterest at around $45bn, which roughly translates into a share price of $70. Given Pinterest shares rose to $63.3 at one point, but actually closed at $55.58 on Tuesday, that represents a premium of around 26%.
Seeing stocks suddenly rise on acquisition rumours isn’t uncommon. But the keyword here is rumour. Neither PayPal nor Pinterest confirmed discussing a potential deal. Nor is there any detailed information as to what such a deal would actually look like.
I think it’s also worth noting that Microsoft has previously tried buying Pinterest at a higher price of $51bn, which the social media platform rejected. Perhaps this is why the Pinterest share price has since fallen again to around $58 from that $63.3 high. With no guarantee of an acquisition, it seems many investors used the surge in price as an opportunity to close their positions. But let’s assume the rumours are true. Why would PayPal want to acquire a social media platform?
Does the deal make sense?
At first, the combination of a payment processing business and social media doesn’t really seem to fit. However, as the world continues to shift its shopping habits to the online space, social media platforms have been launching their own e-commerce environments. For example, Facebook now has an entire marketplace on its platform where users can buy and sell their own stuff. And so far, this has proven to be a highly lucrative venture.
Due to rising pressure from competitors like Shopify, PayPal could be venturing into this new space as means of maintaining its growth. With that in mind, a social e-commerce platform could fit nicely into PayPal’s payment ecosystem. And given that Pinterest was designed for item discovery, it could serve as the perfect landscape for driving online sales through PayPal’s network. At least, that’s what I think.
The bottom line
As a PayPal shareholder, this deal looks like it could be quite complementary. However, would I buy shares in Pinterest today on this news? No, I wouldn’t. In my experience, a potential acquisition is a poor method of selecting which stocks to invest in. And since larger historical acquisition attempts have failed, I think the odds aren’t exactly in Pinterest shareholders’ favour.
For now, I’ll be staying on the sidelines and seeing how this story unfolds.
