Does PayPal Have a Buyer?

0:01Travis Hoium:PayPal may finally have a buyer. Motley Cool Hidden Gems Investing starts now.

0:09Travis Hoium:Welcome to Motley Cool Hidden Gems Investing. I'm Travis Hoium joined today by Lou Whiteman and Rachel Warren. And guys, we may finally have a deal for the company that has been kind of on the block, kind of a value stock, kind of a what in the world are they doing there? PayPal. So Rachel, So what did we find out this morning and overnight about Stripe potentially buying the company? Major breaking news reports. So payments giant Stripe and private equity firm Avent International have reportedly submitted a joint confidential proposal to buy PayPal for$60.50 a share. That would value PayPal at over$53 billion.

0:46As of the stock's closing price yesterday, that was a 28 % premium based on their share price at the time. The deal is reportedly backed by about$50 billion in committed bank financing. Now, what's interesting about this is under the terms of the proposal, both Stripe and Advent would take equal stakes to run PayPal as a 50-50 joint partnership. And the idea would be to keep the company intact rather than breaking it up or selling off its core assets. Going back to that$53 billion valuation based on the reported terms of the offer, this is tracking to be larger than the years ago Musk's purchase of Twitter for$44 billion.

1:20But it also really highlights how far PayPal has fallen from its pandemic era peak back in 2021. I mean, back in those days, it posted a market cap of about$360 billion. This is interesting, right? I mean, this is in the middle of what some might call kind of a chaotic internal transition for PayPal. They've got the new president and CEO. He's been pushing a turnaround plan targeting over a billion in cost savings. Now for Stripe, this is still a private company. We've heard a lot of reports that they might go public in the last few years. Their private valuation is reportedly around$160 billion.

1:52So absorbing PayPal could really be a massive way to scale their footprint, obviously grants them access to hundreds of millions of active consumer accounts. It would match that consumer brand that PayPal has with Stripe's backend developer infrastructure, could also hand them a place within the digital currency race as they absorb PayPal's stable coin into their ecosystem. Now, we haven't seen any response from PayPal, you know, formally responding to these initial overtures. Wall Street seemed happy in early trading, but there's still a lot that we don't know, guys.

2:20Travis Hoium:Yeah, Lou, that that is the thing here is if you squint, some of this makes a little bit of sense. But then you look at the structure, 50-50 deals. Stripe is kind of buying PayPal and kind of not can't exactly fold it into your current business, at least seamlessly. This also puts Stripe in a little bit of a strange position because a lot of the payment companies have built on top of Stripe. And now you're a competitor with PayPal. what should we think about this strategically and how does the private equity piece of this play into it in your mind?

2:51Lou Whiteman:Yeah, a lot of thoughts here. I mean, for once, so Stripe is kind of building their own PayPal. So I guess they don't worry about the competition as much as I do. I think you're right. I think that would be kind of an awkward conversation, but they either feel like they have to get there. So they just need to, or they're not worried about that. Here's the thing. There is value in PayPal. There really is. It's a good brand. I don't particularly like the stock. I don't think this is going to work. For one thing, you always with these things, somebody leaked it. Who leaked it? And it's the acquirers who leaked it.

3:22Lou Whiteman:This was the offer was made a month ago or so. This is to try and work.

3:26Travis Hoium:That was the other thing that stuck out to me is it's apparently been on the table for a while.

3:29Lou Whiteman:Yeah, this is trying to light a fire under PayPal to get a response. And here's the thing. The value in PayPal for me right now is their cash flow. $6 billion of free cash flow. This is a mature company. This is a company that I don't think has a natural pathway for growth. It makes sense to take it private. The advent side of this deal makes all the sense of the world. Use that cash flow to pay down the debt you take on and create value that way. That's just private equity 101. There's a tension here though, right? Because a private equity firm has a different motivation and different set of goals than a growthy fintech.

4:06Lou Whiteman:And this 50-50 partnership, if done right, I guess is possible, but there is some inherent tension of running it for advanced needs versus running it for whatever reason Stripe thinks they need it. It's not impossible, but there's a lot of ways you can go wrong. I think PayPal will reject this. The other thing to note here is because they're such a mature company, about 75 % of their ownership is institutional. And I'll be honest with you. If I was sitting at that desk, I don't want to own PayPal personally. But if I was one of those institutional holders and I was looking at that cash flow, I would want at least 80.

4:40Lou Whiteman:It starts with 80. So I don't think, and I could be way off here, but I don't think for the people who matter, if the shareholders that could pressure PayPal to the table, I think there's still a long way to go before this makes sense.

4:52Travis Hoium:Lou, I wanted to ask about this would be a private company being involved in buying a public company, which means that in theory, unless they're going to go public through the back door of buying PayPal, which I don't think is probably the case. Like Rachel said,$160 billion valuation in private markets. But that's private markets. And a lot of these companies, PayPal, Adyen, have taken it on the chin over the past year or so. So that number may not actually be what the market is going to bear. so they're gonna have to come up with the capital. I think the reports are they make a couple billion dollars in free cashflow.

5:26Travis Hoium:I have seen numbers that almost all of this deal could be funded with debt through that private equity piece. What I guess I worry about with a company like Stripe is this was supposed to be one of the hot fintechs, one of the great IPOs potentially coming to the market. And now you're looking at potentially levering up a business that I don't know if it's fundamentally in decline, but there's at least a lot of questions about how profitable these payment infrastructure companies are gonna be in the future. So is that a massive risk to think about? Stripe is just kind of making a last gasp effort to grow the business when there's not a lot of growth necessarily left in the core business.

6:02Lou Whiteman:If Stripe was public, that would be a big worry of mine. I think that another way of saying what you're saying is that I don't want their cash to go to just paying off the debt if they have opportunities to grow. The thing is, again, PayPal generates so much cash. I do think that whether it's Advent 100 % or Stripe involved, I do think that the target's cash flows can basically cover the debt or go a long way for there. So I think it is more what can we partner with? How can we make this synergistic? But look, on that$160 billion number, that is great until you have to try to deploy it. There's a lot of great reasons to be a private company, but one of the great things about being a public company is price discovery.

6:44Lou Whiteman:There are millions of people giving their opinion every day on what the value of your shares are versus just a couple of people desperate to get in and a couple of employees desperate to get out. You tend to have higher valuations in private companies for that reason. This might be more intriguing if they were trying to use it as some crazy way to go public where they are just putting their arguably overvalued shares to work to swallow this up and generate that cash flow. That might be a neater deal. Then we're talking sort of like Rocket Lab Iridium where a young growth company is buying a cash stream.

7:17Lou Whiteman:This is just sort of a convoluted mess right now. I see a world where PayPal is taken private. I think it makes a lot of sense in a PE portfolio. The Stripe element, I think they have to go significantly higher to make this work. I could be wrong here, but I do think that. And if so, how far can Stripe go?

7:35Travis Hoium:Definitely a lot that we'll be covering in the future because PayPal has been one of these companies that looks like a value stock for a very long time, but the stock just hasn't worked for investors. And maybe this is the best path out. When we come back, we're going to talk about Johnson & Johnson's earnings. You're listening to Motley Fool Hidden Gems Investing.

7:52Lou Whiteman:As a podcaster, my voice is heard by thousands. And now with Vanguard Investor Choice, I can be heard by the companies that I invest in too. Vanguard Investor Choice makes it easy to set your proxy voting preference for your Vanguard Index funds. In just a few clicks, you can make your voice heard on important shareholder topics like executive pay and director elections. Visit vanguard.com slash investor choice to learn more. Vanguard Investors own shares of Vanguard Index funds and those funds own shares of the companies they invest in. Available for Vanguard index funds that participate in investor choice.

8:25Lou Whiteman:Vanguard Marketing Corporation Distributor.

8:28Travis Hoium:Welcome back to Motley Fool Hidden Gems Investing. Johnson & Johnson reported earnings this morning. Results look solid. At least pre-market, the market didn't like what it saw. But Rachel, what do you think about the results from J &J? A few key numbers here. So Johnson & Johnson, they brought in just over$25 billion in revenue for the quarter. That was up about 7 % from a year ago. Adjusted earnings per share of $2.90. That was up about 5 % year over year, both on the top and bottom line. They beat Wall Street's expectations. And, you know, management actually hiked their full year sales guidance to over $101 billion.

9:01That's putting Johnson & Johnson on track to cross the$100 billion milestone for the very first time in a roughly 140-year history as a company through all its iterations. Now, what didn't investors like? You know, there was a minor revenue miss in their medical device division, their med tech division. They saw a slight drop in sales for their abiomed heart pumps. But I think also we're seeing some hyper fixation on short term patent anxieties. Now, this is something that flicks the life cycle of every pharmaceutical company, even the biggest and best in the world. For a long time, they have generated tremendous growth from their blockbuster drug Solara.

9:34That is a drug that is now seeing a lot of competition from biosimilars. And so that's dragging down some of their legacy numbers. Now, I'm a long term shareholder of Johnson & Johnson. If you're a long term investor in this business, I think today's drop, at least in the early morning hours. This is short-term market noise. This is a business that has increased its payout for over six decades every single year and counting. They have a very diversified revenue engine. They have a lot of newer business additions as well from new blockbuster drugs, and they're rolling out their next-gen blockbusters.

10:06No major patent risks until the early 2030s beyond Stellara. So a lot to like about this business.

10:11Lou Whiteman:Yeah, Rachel, summed it up pretty well. One note on the medtech business, and I think it's an interesting aspect. We don't think of healthcare as cyclical because people are always getting sick and always need to get better, right? But there is a cyclical element in here. And I think, you know, the med tech part, yesterday we saw intuitive surgical down a lot and a lot of device companies and supply companies fall. HCA, the big public hospital chain said the number of surgeries they performed in the quarter are down. To me, that says that whatever's going on with the med tech business, that isn't a J &J problem.

10:41Lou Whiteman:That isn't anything specific to them. That's a macro problem. But it is, I think, as investors, that's just the cyclicality of healthcare. We don't want to get political here, but there are a lot of reasons why that surgeries may go down right now from healthcare coverage to economic woes. We saw this in the pandemic where, you know, surgeries just went down. That's probably the most obvious example. But I think for J &J and its investors and intuitive surgical too, I don't think there's anything to worry about when you see it affecting everybody. But it is sort of just an interesting, odd thing.

11:10Lou Whiteman:I don't think we think of it with healthcare is that there is a cyclicality there.

11:14Travis Hoium:You would think that raising guidance, I think both on the top and bottom line, would be a good thing for a stock. But investors don't seem to think that at least early in trading, shares are down about 0.6 % as we're recording. We'll see where this one goes in the future. When we come back, we're going to talk about the drama that Uber is having in Washington, D.C. You're listening to Motley Fool, Hidden Gems Investing.

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12:35Travis Hoium:Welcome to Motley Fool and Gems Investing. We've talked a lot on this show, at least especially on Wednesdays, about Uber autonomous vehicles in the future of that business long term. I'm a bull on Uber's case as the disruptor and the aggregator, but Lou, seems like they're taking a little bit of a different approach in DC.

12:54Lou Whiteman:They are not acting like a disruptor anymore, Travis. Uber is acting like a nervous dinosaur, a nervous incumbent, period. Okay.

13:02Travis Hoium:I actually hate that you're making, I think, a compelling argument that that is the

13:06Lou Whiteman:case. And I'm not going to rub on your face and say we were talking about this a year ago, Travis, so we should have seen this coming, right? But look, the good news here is that for all of us is that I think the age of autonomy has arrived. Companies tend to act as partners and be friendly and work together when technology is experimental, when we're just trying to figure it out. The second that it has arrived, that's when the knives come out and they fight. And that is really what's going on. In Washington specifically, Waymo would like to just operate Waymo. Uber opposes the bill that would allow this.

13:38Lou Whiteman:And they have been lobbied instead for a system that will require robotaxis to operate on a ride-hailing network that also uses human drivers. So as you catch that, they would like Waymo to have to go to an existing third-party network. I don't know who that would be. I mean, Lyft maybe, but I think we know what they're trying to do. Here's the thing. Uber doesn't have a driverless solution. That was their choice. And it probably was a good choice considering the money that they'd have to spend. But their product at this moment is their inventory of customers. It is very, very important for them to make sure that that product is exposed to the surface, that you can't bypass that product.

14:15Lou Whiteman:15 years ago, Uber was the disruptor. They were the ones trying to tear down regulations. They were the ones trying to rip out the rules. Now they are the defenders of the horse carriage in the age of the automobile. Their goal is to use regulatory capture, regulation to slow down the transition, not disrupt the status quo that works pretty well for them. It will work for a while. It's a very compelling story. Uber's up there talking about all of the jobs that will be lost, which is really funny if you look back at their narrative over the years, but it won't last forever. And as an investor, I think we have to be aware of that.

14:48Travis Hoium:Yeah, Rachel, the interesting thing here is it seems like Uber is not opposed to autonomous vehicles. They just want to make sure that their business model is still intact and is, like Lou said, not disrupted. The other angle to this, and the thing that we've talked about a couple of different times is their strategy is to basically arm as many autonomous vehicle companies as possible. We can get into Lucid and the challenges that they've had this week, at least in the market. But that's one of the companies that they helped fund. Lucid's working with Nuro to bring autonomous vehicles to market.

15:20Travis Hoium:Uber is going to be one of the buyers of those vehicles. That's not the only company. There's a half dozen or a dozen companies. But none of them are really hitting market at scale yet. And I think that seems to be the challenge for Uber is you can't use that network to build the autonomous vehicle fleet if the fleet isn't quite ready to hit the road yet. I think that's right. There's a couple of things to look at here. First, just taking a step back, you look at Uber's history, which Lou touched upon briefly. I mean, over a decade ago, Uber won the ride sharing war by use of aggressive lobbying to crush a lot of the local tax monopolies.

15:50And today they're facing a different threat from driverless cars. Maybe the old playbook isn't working. And as Lou said, you know, there is a lot of lobbying happening on the hill trying to block standalone AVs from taking over, pushing for laws that would force robot taxes to work on these hybrid networks. There was documentation reporting that came out that showed that, you know, in New Jersey, for example, Uber tried to pass a rule that would force any driverless company to have human drivers handle 85 % of their rides. Now, we saw Uber and Waymo and their partnership pilot in Phoenix last month.