The price action of Paypal for the past several months has been sufficiently strong that the current valuation does not appear to be justified, even remotely, from an operational improvement perspective. The company had pontificated, recently, about good growth in the number of merchants that accept PayPal. Individual transactions were also reported to be on the increase. There has been chatter that PayPal will soon permit the purchase and transfer of certain cryptocurrencies; no doubt this will carry a juicy transaction fee. While all of this is good news, the company has a demonstrated history of providing a lot of colorful reports about growth and revenue initiatives on a quarter to quarter basis, only to badly disappoint investors and analysts alike when financial reports are released.
There are few truly attractive horizontal fintechs of any size in the space. Visa and Mastercard control the interchange networks and PayPal represents one of the largest customers of both firms. If Paypal were a takeover target, a natural acquisition might come from either firm. There would be anti-trust issues, but there are ALWAYS anti-trust issues. Another business combination possibility might come from an Amazon, or perhaps an Alphabet. I think that a firm such as Microsoft, which makes very few meaningful acquisitions and that has a balance sheet easily capable of making such a purchase, might be a real thought There is practically no overlap between Microsoft and PayPal and accordingly, little anticompetitive red flags to be thrown up. The movement of money, the profit margins that are earned from it and the potential for Microsoft, or any other acquirer for that matter, to establish some capital discipline in PayPal, might make some sense, in this lofty environment. PayPal Shareholders would gladly take a combination of some cash and shares of a marquee company, I feel.
A takeover of PayPal Holdings isn’t likely, but given the rarified air that the shares are selling for, there is either a massive bubble forming, or, alternatively, we must consider a premise that somebody, or somebodies, know something that we do not and that something would need to be sufficiently important to support the shares at current levels.