Motley Fool Hidden Gems Investing - Who Pays for PayPal?

Starting point is 00:00:00 Who is adding PayPal to their checkout cart? Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Travis Hoyum, joined today by Rachel Warren and Lou Whiteman. Guys, the big talk of the market this week is PayPal, which has been in this strange zone of value stock, can't seem to get its shares going anywhere. They have changed CEOs, but now there's talk that they may be acquired by someone, may put themselves on the block. Lou, does this make sense for somebody else to buy them and who possibly could actually pull off a deal and not kind of destroy their own business in the process? First thing we need to make clear is PayPal is not a distressed asset, period. The business is

Starting point is 00:00:59 healthy. The business is fine. The issue is it's a low growth business. Shares are off 84% from their all-time highs. Some of that was COVID hysterica. The company is profitable. Cash generation is strong. Share count is down 20% plus over the last five years. That is not a distressed asset. When I first saw these reports, my thought was private equity. Everything I just said. This is an ideal scenario to take a company private, use those cash flows to pay down the debt and also kind of get out of this quarter to quarter spotlight of when will you grow, which I think would help this business. We'll see what's going on here. One thing I think, though, is that PayPal is not on the block. PayPal. So they haven't put themselves up for

Starting point is 00:01:40 sale. I don't believe that. I think that the market, that that opportunistic potential acquirers are looking at that drop and realizing everything I said is true, that this is not a distressed asset and maybe we can do a deal here. We can talk in a second about rumored buyers, potential buyers. To me, someone like Silver Lake Partners kind of makes a ton of sense on the private equity side. You know, even there was talk of Addian, the European payments company, which, you know, kind of the create a, just kind of give them everything they need in the U.S. and build on their strengths elsewhere. I think that if PayPal did go on the block, there'd be a lot of at least people wanting to look at it but we'll see where this goes

Starting point is 00:02:21 rachel what are you thinking when you hear a company like paper you know it has been in value territory one of the options is to just keep buying back shares they could buy somewhere between 10 and 15 percent of shares outstanding pretty easily each year but does the sale maybe make more sense you know i think it's possible and i agree with lou this is not a distressed business i do think there's an argument to be made this is a really undervalued business as it's trading right now, you know, shares are down about 40% over the last 12 months, about 80 to 85% from their 2021 peak. And you look at how the company's market cap has fallen to about $43 billion. It does make a full takeover more feasible for, you know, potential mega cap suitors. I mean,

Starting point is 00:03:03 you have to think about the really strategically valuable assets that PayPal could bring to the table if they were acquired. I mean, you've got Venmo, right? They're widely recognized as the most pristine asset for PayPal with high growth, about 20% annually. There's a lot of popularity among younger demographics. PayPal operates one of only four globally recognized payment networks. You know, they process nearly $2 trillion in annual transaction volume. You've got the Braintree business, right? That's the unbranded processing business for large corporate clients that could be really attractive to a potential buyer. And even the incoming CEO, Enrique Lores, is that he has a history of breaking up complex businesses.

Starting point is 00:03:42 I mean, there's been some speculation that maybe he was even brought in to lead a sale or major structural overhaul. So I do think this talk makes sense. I mean, we're gonna have to see if it's more than just rumors, but it is something that I think is intriguing and perhaps makes more sense for the business

Starting point is 00:03:57 than say four or five years ago. Lou, Stripe was one of the names that has come up this week. They're still private, but there's a lot of hype behind Stripe. They're very highly valued. I think $159-ish billion valuation, whereas PayPal is profitable and only has about a $40-45 billion valuation, strategically would straight make any sense. And then if we want to open the can of

Starting point is 00:04:23 worms, how in the world would they pull off a deal? Yeah, the valuation is really interesting. I'd love to know that in the time of a deal, whether or not PayPal shareholders would agree with that valuation. When you are in private markets, you're not being marked every day the way that PayPal is. So it's very possible that their market clearing price is more like $60 billion. Yeah. I mean, the great thing about the public markets is, is that all of the buyers, all of the sellers, the sheer mass of people, that's how you get to price discovery. So yeah, but that's neither here nor there. Look, Stripe is a really, really good business. They have been a great success, but this would be an interesting

Starting point is 00:04:58 deal for a couple of reasons. For one, I don't know what antitrust would think of this. I think it probably gets through with regulators, but I don't think they would like it. Secondly, Stripe has sort of made its mark as being the agnostic rails for payments for them to basically get into competition with a lot of their customers. I don't know how that would go over or what that would do. Again, opportunistic is so important here. This is how Stripe could go public. That would be a really, really complicated deal. I think it would be easier for them to just raise gobs and gobs of cash, maybe through debt and then do an offering afterwards. So I am personally dismissive of the idea of like a reverse merger to take Stripe public. But look again, how much

Starting point is 00:05:45 of this is Stripe actually saying we need to buy this and how much of this is just seeing a decent asset marked down and just saying, Hmm, that's interesting. That's my question. Yeah. Rachel, So what do you think? Does Stripe make any sense as a buyer? It's fun to talk about, but every time I think through it, Lou's right. They are kind of the Switzerland. They're very much a digital company. PayPal's trying to move more into the physical world in a lot of different ways. So I don't know, there could be pluses and minuses. I do think it could make sense. I mean, the important thing to remember is Stripe is really dominant in business-to-business and merchant infrastructure, but they really lack a direct

Starting point is 00:06:21 consumer brand, which of course, that's something that PayPal could provide. I mean, for a long time, Stripe has really been known as this sort of digital bridge. They allow businesses to accept payments over the internet and in person. They handle that really complex technical and banking infrastructure. They processed about $1.9 trillion in total payment volume in 2025. That was up about 34% year over year. It's a really, really robust business. Obviously, there's the valuation gap. They're reportedly valued about four times greater than what we currently see PayPal's valuation at. Another thing that's kind of interesting is both Stripe and PayPal have been moving much more deeply into crypto rails. So you could see how a merger could maybe create

Starting point is 00:06:59 a dominant global stablecoin player. That's something that I think there might be some interest in. There's also this idea that Stripe might only target very specific units, right? Like Venmo, for example, to gain a consumer wallet or Braintree to scale their merchant processing business. I think right now this is a lot of speculation. You know, did a good job of outlining kind of the different ways this could go. I do think it's very possible that we could look at this deal as maybe acting as a mechanism for Stripe to go public. And that would allow the combined entity to trade, of course, on a stock exchange, which is something we have seen a lot of rumors for years that Stripe was going to IPO and has reportedly kept delaying

Starting point is 00:07:35 that. So I think there's a lot more questions than answers right now. I do think, though, that if in fact Stripe is interested in buying PayPal, it does pose an intriguing opportunity This is something that I think we're going to want to watch closely. I'm going to make a bold prediction here, and that's that nothing is going to happen. And there's nothing more bold than saying nothing. But look, PayPal's board just changed the CEO. They put out an investor deck saying there's 100 ways for us to grow. Now, I sort of think that if you have 100 ways, it probably means you don't have one.

Starting point is 00:08:03 So I'm not going to take that as face value. But this is not a company that is saying, you know what, let's fire the CEO, bring in a new CEO with a plan and also put ourselves for sale. This is someone being opportunistic, seeking to get a deal. The funny thing here is, is that if you buy that premise, that the board is not looking to sell, the only way to change their mind is to maybe get rid of the opportunistic part of it by significantly overpaying. I think that PayPal's destiny is to be acquired one day. i don't think it's going to be in 2026 but i could be wrong if it's not acquired maybe this 17 pop that we've had over the last week is going to fade away but we'll see what happens

Starting point is 00:08:47 definitely something we're recovering for a while here on motley fool money when we come back we are going to talk about axon's blowout quarter you're listening to motley fool money new from nespresso blend wellness into your coffee routine with a coffee plus range infused with functional benefits choose the coffee you love with added b vitamins like coffee plus b12 to help support immune function and coffee plus b6 to keep your day moving or go with the flow and choose ginseng delight our new double espresso with ginseng extract whatever lies ahead don't change your morning let your morning change you discover coffee plus on espresso.com welcome back to motley fool money rachel i gotta be honest axons of stack that i've held since sometime late in

Starting point is 00:09:32 2014 or early 2015. My biggest holding for a very long time. I've trimmed and yet they continue performing so well that it continues to kind of be in that top spot. That happened again last night. Shares are up 20% in early trading on Wednesday after another just crazy good quarter. What did you see from the quarter from Axon? Axon's Q4 results, it was really a masterclass in the continued shift that they're executing from being this hardware first company as they've been known to a high margin software and AI powerhouse. I mean, the headline numbers were incredibly impressive. Revenue hit 797 million. That was up 39% year over year. Handily beat Wall Street's estimates. Adjusted earnings per share of $2.15, way above the 160 estimate that Wall Street was

Starting point is 00:10:17 looking for. They had a record $7.4 billion in annual bookings. It's a 46% jump. And I think it shows just how much demand is growing for their ecosystem. Really important to note as well, their AI era plan that they have been continuing to implement, which is all about embedding practical high impact AI capabilities across their hardware and software ecosystem. It seems to already be proving its worth. I mean, that accounted for about 750 million in bookings in its first full year. Software revenue was up about 40% year over year, their net revenue retention hit 125%. So existing customers, they aren't just staying, they're spending significantly more on those premium tools. I think it's hard not to be bullish on how Rick Smith and the team

Starting point is 00:11:00 are executing this. They're targeting now $6 billion in revenue by 2028. They had a backlog of about $14 billion of contracted revenue at the end of the year. So it's really a fantastic company. And seeing how they're really redefining their entire product category with AI, something that's not particularly easy to do, I think it's been pretty impressive. Lou, what'd you take from the quarter? So I was wrong here. I have to admit, I am also a shareholder. I like the business long-term, but I really was worried about this quarter. They had a rough time last quarter and it just felt like sky-high expectations plus a tough environment for local government spending. That might just

Starting point is 00:11:40 mean growth wouldn't pan out. And obviously that didn't happen. The $14 billion backlog of future business, what really stood out to me more than just kind of the numbers, it's possible that why i was wrong is is that in a tight budget environment tools that allow you to do more with your same personnel that that is compelling enough is this a great business this is still a work in progress i might push back on that that it's just a fantastic business there's tons of capex and if you look at the net income relative to revenue for a company that's been around this long you know almost 800 million in revenue and they can only generate 3 million in net income. That's not what you want to see long-term. I'm going to give them a pass for

Starting point is 00:12:19 that now because they are building something. A ton of stock-based compensation here, still trading at 60-time future earnings. To me, this is the definition of a hold and not a buy here. I'm glad I'm in where I am. I don't find this as like, wow, this is the best opportunity to throw new money for me, but there is no reason to hit the exit either. Lou, one of the things that I remember writing a lot about years ago was you don't want to worry too much about that bottom line because they're in growth mode. But now they're a pretty mature business, almost $800 million in revenue for the quarter. That story was starting to change. And if you look back at the chart, I mean, $135 million in net income a year ago. So we were

Starting point is 00:13:03 starting to push on that operating leverage. But now that's gone backwards. Is that okay if you have 38% growth in the quarter? Or is that still something to worry about long-term is that they're not actually going to translate this revenue growth to bottom line success? That's glass half empty, glass half full is they still see enough worth investing in that they are still in investment and growth mode. I tend to give them the benefit of doubt because they've done so well over the years, but look, it's a thing until it isn't, right? I mean, at some point they do need to just be able to turn all of that revenue growth into oversized profits. I don't think the market should be demanding it today. I get the response, but it's just something I think for a long-term

Starting point is 00:13:48 shareholder to watch. This is another interesting story of how businesses can just change over time. Rick Smith sold a vast majority of his shares when the company was still Taser International. And then he got, after Elon Musk did that huge stock compensation package, they basically copied the exact same package for Axon and he has done very well. It has worked out very well for investors, but just always an interesting wrinkle to the Axon story. When we come back, we are going to get Lou's thoughts on his favorite restaurant, Cava. You're listening to Motley Fool Money. New from Nespresso, blend wellness into your coffee routine with the Coffee Plus range infused with functional benefits. Choose the coffee you love with added B vitamins like

Starting point is 00:14:29 coffee plus b12 to help support immune function and coffee plus b6 to keep your day moving or go with the flow and choose ginseng delight our new double espresso with ginseng extract whatever lies ahead don't change your morning let your morning change you discover coffee plus on espresso.com welcome back to molly fool money i am still waiting for lou to take me to kava at some point because we don't have it in the minneapolis area but this is one of those companies that continues to perform really well. Rachel, what did we learn from Cava this quarter? They are doing a really good job of, I think, scaling into a really sustainable growth enterprise. They officially crossed the $1 billion annual revenue milestone, which is a

Starting point is 00:15:12 big deal. The Q4 featured a 21% revenue increase. They significantly outperformed Wall Street's expectations. Even though top line growth was strong, though, same restaurant sales grew less than 1%. So a lot of the growth they're seeing is being driven by changes like higher menu prices, and product mix. We actually saw that guest traffic declined by about 1.4%. There was a roughly 100 basis point drop in restaurant level profit margin as well, but still about 21%, which is pretty solid for a business in their sector. Now they're still maintaining their aggressive 2026 outlook. They're looking to open anywhere from 74 to 76 new stores. They're looking for a rebound in same store sales growth of up to 5%. And they're in an interesting spot. You know,

Starting point is 00:15:58 they're clearly kind of this it brand and fast casual. They're facing that same consumer reality that the Chipotles of the world are. People are sometimes spending more per visit, but the dip in traffic suggests at least some fatigue in frequent visits. They're leaning into some menu shifts. They're launching this exclusive invite-only loyalty tier. I think we've got a high growth story here. There's obviously some visible near-term headwinds from the macro environment, but they have zero debt. They're still aiming for 1,000 stores by 2032. I like the business. I think it was a solid quarter and a great year for the company. So Travis, I'm happy to have a cover ball with you, but obviously I'm cheap. So I'm going to try and

Starting point is 00:16:35 get you to pay just, just for the record here. Like Rachel said, this quarter was about pricing power. Uh, the slight uptick in same store sales, judging on the curve of a lot of the rest of the industry, that's pretty good, but it was a 1.9% increase in menu price and product mix. Not that fact that people are coming more. This is an interesting moment for them. We talked about the Axon, talked about that this is still a relatively small company. They just crossed a billion dollars in revenue. They're only in 26 states. There's massive potential if Travis is part of the world. We'll eat Mediterranean rice bowls, which we'll see. I'll give it a shot. It's really good. And it's a lot healthier than some of the other stuff that people are eating.

Starting point is 00:17:16 But, you know, that's neither here nor there. Here is, you know, Rachel was saying that, you know, that it's all coming from new restaurants. But that is a path for success here. They're going to open 75 restaurants in 2026. In theory, they can grow at that pace into the 2030s just to hit their target of a thousand locations. And again, they're only in 26 states, so there is places to go. If they can grow at that pace and have flat same store sales, it's at least probably good enough. The other thing I'd say is, is that, you know, the market reaction here, whatever we're talking about. Quarterly reports are often more about expectations going in than the actual results. Kava has been cut in half since the beginning of

Starting point is 00:18:00 2025. Rivals are having trouble. There is saturation there. The macro picture from here is cloudy. You don't need to be a wow quarter all the time. In this environment, good enough is good enough. And this is almost as delicious as a Mediterranean bull. To put their growth potential into a little bit of context they could almost 10x the number of restaurants that they have and they still wouldn't pass chipotle so there's there's a lot of growth one runway potential here for kava hopefully they will make it to the upper midwest one of these days as always people on the program may have interest in the stocks they talk about and the motley fool may have formal recommendations for or against so don't buy or sell stocks based solely on what

Starting point is 00:18:41 you hear all personal finance content follows the motley fool's editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Lou Whiteman, Rachel Warren, and Dan Boyd behind the glass, I'm Travis Hoyum. Thanks for listening to Motley Fool Money. We'll see you here.

Motley Fool Hidden Gems Investing - Who Pays for PayPal?

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