PayPal: Stripe and Advent Reportedly Make an Offer

Key Morningstar Metrics for PayPal Holdings

• Fair Value Estimate
  : $80.00
• Morningstar Rating
  : ★★★★★
• Morningstar Economic Moat Rating
  : Narrow
• Morningstar Uncertainty Rating
  : High

Reuters reported that Stripe and private equity firm Advent International have made an offer to buy PayPal Holdings PYPL in a deal that would value the company at $53 billion.

Why it matters: The reported offer would equate to $60.50 per share. PayPal’s stock price has increased more than 15% in early July 15 trading in reaction to the news. But the market price is still at about 10% below the reported offer, suggesting some skepticism that a deal will actually be done.

• While Stripe has enjoyed strong growth, we think adding PayPal could strengthen its hand in the online space. At a minimum, adding PayPal’s volume would provide benefits, since we view moats in the space as primarily driven by scale-based cost advantages. PayPal’s current stock price offers an opportunity to cheaply add volume and capabilities.
• We think the offer supports our thesis that the market is overly negative on PayPal and other legacy payment names.

The bottom line: We will maintain our $80 fair value estimate for narrow-moat PayPal for now.

• If we think a deal becomes the most likely outcome, we will adjust our fair value estimate to the acquisition price. But at this point, the likelihood of a deal and its terms remains in question.
• While the reported offer is materially below our fair value estimate, it does represent a sizable premium to recent market prices, making it potentially more difficult for PayPal to say no, especially considering the recent change in CEO and the fact that the company has not had time to fully implement his strategy.