News broke on Wednesday that PayPal Holdings may be considering an acquisition of visual search and media company Pinterest. The rumor sent shares of Pinterest soaring. As of 1 p.m. EDT, the stock was up about 13%.
The timing of PayPal's consideration to buy Pinterest makes sense. The stock has been hammered this year. Before the growth stock's bump today, shares were down 16% year to date. Moreover, the stock is down 30% from all time highs -- and that includes the stock's pop on Wednesday.
Given this rumor and the stock's big gain today, what should investors do?
Buyout rumors: What you need to know
PayPal has been reportedly talking with Pinterest about buying the company for a potential price of $70 per share, Bloomberg News said on Wednesday. This would represent more than a 25% premium for Pinterest stock based on where shares were trading before this rumor started circling.
The photo- and idea-sharing website, which makes most of its money from digital advertising sales, has been morphing into a discovery platform for online purchases. Indeed, just this month, Pinterest announced new features that enabled sellers to upload product catalogs and make them discoverable to target audiences. The evolving shopping aspect of Pinterest's platform may be one thing that makes the potential acquisition attractive to digital payment juggernaut PayPal.
What should investors do?
Given the stock's sudden surge, current Pinterest shareholders may be tempted to do some profit-taking. And prospective investors may be considering buying the stock in hopes that the potential acquisition is more than just a rumor. After all, the rumored $70 price tag still represents a 13% premium from where shares are trading at the time of this writing.
While it's tempting to take action on this news, oftentimes in investing it's best to lean toward inaction over action.
For investors who already owned Pinterest stock, there was likely something about the underlying business that seemed attractive to them. Pinterest's core business remains -- and it will remain even if the acquisition never pans out. So why sell today?
For investors who didn't own the stock, there was likely a reason they were avoiding it already -- so they shouldn't rush to buy shares out of speculation that they'll see a short-term pop. After all, it's always possible that an acquisition never comes to fruition.
So, are Pinterest shares a buy, sell, or hold today? It's likely wise to consider them a hold -- at least until there's more clarity about whether the company will remain independent or not.
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