PayPal stock jumps on Stripe, Advent acquisition rumors: what went wrong?

PayPal's stock surged in premarket trading after reports emerged that Stripe and Advent International had offered to acquire the company for over $53 billion. 

The offer, valued at $60.50 per share, represents roughly a 28% premium over PayPal's most recent closing price. Shares have traded as low as $38.46 over the past year, a steep comedown from PayPal's peak market capitalization near $340 billion in 2021. 

So how did PayPal fall from a $340 billion valuation to being acquired for just $53 billion?

PayPal has fallen from grace

PayPal, one of the best-known in the fintech industry, has fallen from grace in the past few years. Its stock has plunged from the pandemic-era high of $300 to the premarket level of $54. Its market capitalization has plunged from near $340 billion in 2021 to $53 billion today.

The decline has coincided with the broader weakness in the fintech sector, with many of its competitors being much lower than their all-time highs. Jack Dorsey’s Block has plunged from a high of $288 to $79 today, while Shift4 Payments fell from $127 to $50. SoFi stock has pulled back from $32.70 to $18.

Even traditional payment companies have struggled in this period. Mastercard stock has dropped by 2.27%, while Visa has risen by just 2.2% in the last 12 months.

The main reason behind this crash is that PayPal’s business is no longer growing as it did before. SeekingAlpha data shows that its annual revenue growth has slumped from 8.46% in 2022 to 4.32% last year. And analysts anticipate that its annual revenue will grow by 3.50% this year to $34 billion.

PayPal has faced some competition pressures

PayPal’s business has found substantial competition challenges across its branded and unbranded business in the past few years. Its branded business has faced competition from companies like Stripe and Affirm. It has also faced competition from mobile wallets by companies like Google and Amazon.

Its unbranded business is also facing strong competition from other money processors globally. 

At the same time, the company's strategy to pivot its business has not been particularly successful. A good example is the launch of its stablecoin business. Launched in 2023, PYUSD has grown to a market capitalization of just $2.58 billion, making it far smaller than USDC and USDT.

Similarly, its attempts to introduce new management have not been successful. It replaced Dan Schulman with Alex Chriss in 2023. After attempting to reinvigorate its growth, Chriss exited this year and was replaced by Enrique Lores, a former President and CEO of HP. 

What next for PayPal?

Stripe and Advent are said to have made a $53 billion bid for PayPal. Such a deal would make sense for them as PayPal is one of the most undervalued companies in Wall Street, with a forward PE ratio of 8.9, much lower than the S&P 500 average of 23. The two companies may decide to break PayPal apart, potentially by spinning off Venmo into an independent company.

The challenge, however, is whether PayPal will accept a buyout deal. If it does, it will demand a higher price than the $53 billion that the two companies have suggested. Also, there is a likelihood that more bidders will come in and place a higher offer, which will benefit existing shareholders.