The Pinterest [PINS] share price has dropped by 30.4% since 20 October to $43.64 at the 4 November close.
The main catalyst behind the fall was an announcement from PayPal [PYPL] that rumours of a potential $45bn acquisition of Pinterest were just that: there was no deal to be made.
On 25 October, PayPal said that it was “not pursuing an acquisition of Pinterest at this time”.
There was a sound rationale behind the rumoured deal, said analysts, as PayPal looks to potentially develop a social commerce offering to its core tech payment product.
For Pinterest, it would have helped to build its ecommerce business. For its shareholders, it meant a deal worth around $70 a share and, indeed, its share price had soared 20% between 18 October and 20 October.
“Not pursuing an acquisition of Pinterest at this time” - PayPal, whose decision rocked the Pinterest share price
Why the PayPal deal failed
Analysts said there were too many barriers in the way, particularly for PayPal.
MoffettNathanson analyst Lisa Ellis said, if successfully integrated, Pinterest could have the potential to strengthen PayPal’s offering and differentiation.
However, as reported by S&P, Ellis warned that effectively integrating the two platforms could distract PayPal from international expansion and breaking further into digital banking.
The reaction of PayPal’s shareholders was also telling: its share price plunged when the rumours were first made public.
According to The Wall Street Journal, despite having early-stage talks, PayPal’s management felt the share price drop would make an agreement unlikely. It would mean that “PayPal may have had to hand a larger portion of ownership to Pinterest investors in a stock deal, something that would further frustrate its own shareholders.”
PayPal’s use of “at this time” implies the deal could be revived at a later stage. It also puts Pinterest in the acquisition spotlight for other fintech groups looking to tap into social media consumers.
“We believe PINS is likely to still be viewed as a potential target given its reasonable valuation compared to other social media peers and sharp share decline the last several months," said Angelo Zino, CFRA analyst, in a note reported by Reuters.
Pinterest also needs a shake up if it is going to add that ecommerce option to its bulky advertising revenue.
“The concern is that you have a bunch of people that surf around the web looking for a couch for their new home. They might pin it, but it’s not that big of a deal. They might never buy it,” Darrin Peller, managing director at Wolfe Research LLC as quoted in The Wall Street Journal.
Pinterest’s potential to bounce back
The Pinterest share price, which is now lower than when the rumours first circulated, took a further battering as investors fretted over its upcoming Q3 numbers, particularly its monthly active users (MAUs).
In its Q2, the group said that US MAUs had declined by around 7% and global MAUs had grown by an unimpressive 5%.
Investors are also said to be worried about what the recent changes to Apple’s [AAPL] iOS ad tracking and measurement would mean for Pinterest ad revenues.
If there is positive news on both these issues, then the Pinterest share price could be revived after its reported Q3 earnings on 4 November.
Strong growth potential
Mark Hake, CFA, writing in Investor Place, is optimistic, forecasting that Pinterest will post positive free cash flow, which could see its stock rebound from current lows.
Indeed, he believes that based on its free cash flow production, Pinterest is worth around $81 per share.
Hake also takes heart from Google parent company Alphabet’s [GOOGL] recent earnings report, which showed strong ad sales — this could be good news for Pinterest revenues as well if advertisers are back spending in numbers again.
“It seems pretty clear that PINS stock is at too low of a price here. I suspect that, once its earnings are released, the shares will begin moving up again,” he wrote.
Wall Street analysts expect a 43% increase in its Q3 revenues to $631.2m, with earnings up 77% to $0.23 per share. They feel bullish about Pinterest and hold a consensus ‘Outperform’ rating, according to Market Screener.
Pinterest has strong growth potential both internationally and in new products and services.
Pinterest has the cash flow strength to make it happen, which should be positive for its share price — acquisition or not — in the future.
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