Michael Burry Says PayPal's $60.50 Buyout Offer Is "Simply Too Low." Here's the Case for a Higher Bid.
Michael Burry Says PayPal's $60.50 Buyout Offer Is "Simply Too Low." Here's the Case for a Higher Bid..
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PayPal (NASDAQ: PYPL) investors finally got some good news on Wednesday, and it arrived in the form of a takeover offer. Privately held payments company Stripe and private equity firm Advent International have offered $60.50 per share in cash for PayPal, valuing the company at more than $53 billion, CNBC reported.
Shares of the payments specialist soared 17% on the news, closing at $55.52.
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Famed investor Michael Burry, best known for his bet against the housing market chronicled in "The Big Short," didn't wait long to weigh in. In a post published Wednesday on his Substack, Cassandra Unchained, Burry, who counts PayPal among his portfolio holdings, wrote that the bid "is at 1.21x IV15 and simply too low."
Is he right? His math, and some of PayPal's own numbers, make a case worth taking seriously.
Burry values companies using intrinsic value, or "IV," estimates. The labels refer to different sets of assumptions, with IV15 representing what a minority investor would pay for shares, by his description.
The problem with the offer, in his view, is that buying a whole company should cost meaningfully more than buying a minority stake.
"A control premium should take any buyout well above IV15, and 21% more is not nearly enough," he wrote.
His estimate of what PayPal is actually worth sits far above the bid.
"True intrinsic value by my methodology is around IV8-IV10," Burry wrote. "IV10 is $75-$80. IV8 is $110-$115. A buyout should be in that range." Adding a control premium to the low end of that range, he figures a winning bid lands at roughly $100 per share.
"$60.50 is just too low. I am not selling, and I believe it is only an opening bid," he wrote.
Burry's valuation figures are one investor's estimates, of course, not appraisals. But you don't need his framework to see why $60.50 could undersell the company.
The premium is smaller than it looks. The offer came in 28% above Tuesday's closing price of $47.37. But that price followed a brutal stretch for the stock. Shares traded as high as $79.50 within the past year, which means the bid sits about 24% below the stock's own 52-week high.
The offer also looks inexpensive against PayPal's cash generation. The company produced $1.7 billion of adjusted free cash flow in the first quarter alone, up 25% year over year, and it has returned $6 billion to stockholders through share repurchases over the trailing 12 months. At the first quarter's pace of cash generation, a $53 billion price works out to less than eight times a year of adjusted free cash flow. The offer also values PayPal at about 11 times earnings .
To be fair, there's a reason the stock was at $47 in the first place. PayPal's growth has been sluggish. Revenue rose 7% year over year in the first quarter, but transaction margin dollars, a key profitability measure for the company, rose just 3%.
Active accounts came in at 439 million, up only 1% from a year earlier and down slightly from the prior quarter -- user growth has stalled. And management's full-year guidance calls for adjusted earnings per share ranging from a low-single-digit decline to slightly positive.
This is not a business commanding a growth premium. But it doesn't need to be for the bid to look light.
