PayPal IPO reawakens dot-com dreams of yore

Stock's 1st day of trading called `an anachronism'


SAN FRANCISCO - An Internet startup goes public. It is not profitable - in fact, it has lost hundreds of millions of dollars to date - and faces competition from stalwarts of the old economy. Yet on the first day of trading, investors go wild, pushing the company's stock up 30 percent.

It sounds like 1999, but it happened Friday.

PayPal, a Silicon Valley company that lets people pay for goods and services online, became one of the first consumer-oriented Web startups to go public since the dot-com bust - and it did so with notable success. The company's stock opened at $15.41 and peaked at $22.44 before closing at $20.09.

The response came after PayPal delayed its initial public offering for a week after it was hit with a patent lawsuit from a competitor and its service was suspended by banking regulators in Louisiana.

Given the obstacles confronted by PayPal, the IPO's success provoked questions about whether investors were responding to the promise of a single company or were pronouncing a renewed appetite for Internet-related companies.

Unlike many past dot-com IPOs, "there is some clarity about how this company is going to make money," said Randall Roth, a research analyst with Renaissance Capital. But, Roth said, the optimism about PayPal does not seem to justify the first-day jump in stock value.

"It's an anachronism, straight out of 1999," he said. "It's like we've kind of forgotten what got us into this situation in the first place."

With the same vigor with which they embraced Internet startups, investors shunned them, starting about April 2000. In the past 18 months, only a handful of public offerings have been from Internet-related ventures.

PayPal declined to comment Friday because of a quiet period mandated by the Securities and Exchange Commission.

It has 12.8 million account holders, with about half its accounts having been active since the first half of 2001, according to company documents. Online auctions account for 68 percent of PayPal's transactions.

PayPal also has capitalized on two other successful areas of Web commerce - gambling and pornography - which account for 10 percent to 15 percent of its transactions, according to analysts who cover the company.

PayPal makes its money by taking a cut of a transaction, roughly 3 percent, from the seller.

Whether PayPal can make a profit remains to be seen. The company lost $265 million in its first two and a half years in business. Its loss rate, though, has slowed significantly in recent months.

The company planned to go public Feb. 7 but postponed the offering after CertCo Inc. filed a lawsuit claiming that it had a patent on the online payment system. And in the past week, PayPal disclosed that it might be subject to banking regulations in several states, including Louisiana, which informed the company that it must stop operating in the state until regulators can assess which licenses it is required to obtain.

Aaron McPherson, a research manager with technology research company IDC, said that despite the obstacles, PayPal is attractive to investors because it is in a "commanding" position in an emerging market. But, McPherson said, another factor in the stock gains might be investors' excitement.

"There isn't much competition for investor dollars," he said, adding that this investment does not appear quite as improbable as many others did two years ago. "I don't think the stock is going to stay" at the highs it has reached, he said, "but the risk in the stock isn't as crazy as some of those stocks in 1999."

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