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SAN FRANCISCO, Feb. 15 An Internet start-up goes public. It is not profitable in fact, it has lost hundreds of millions of dollars to date and faces competition from old-economy stalwarts. Yet on the first day of trading, investors go wild, pushing the company's stock up 60 percent.
Sounds like 1999? It happened today.
PayPal, a Silicon Valley company that lets people pay for goods and services online, became one of the first consumer- oriented Internet start-ups to go public since the dot-com bust, and it did so with notable success. The company, whose stock opened at $13, hit as high as $22.44, before closing at $20.09, raising $70.2 million by day's end.
The response came, on top of everything else, after PayPal delayed its offering for a week after being hit with yet another challenge, a patent lawsuit from a competitor, and having its service suspended by banking regulators in Louisiana.
Given the obstacles confronted by PayPal, the offering's success provoked questions about whether investors were responding to the promise of a single company, or demonstrating a renewed appetite for matters Internet.
Unlike with many past dot-coms, "there is some clarity about how this company is going to make money," said Randall Roth, a research analyst with Renaissance Capital, echoing a view among analysts who cover the industry that PayPal has much to recommend it to investors.
But, Mr. Roth added, the optimism did not seem sufficient to justify the big first- day run-up.
"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."
What fueled the boom, and soaring stock prices, back then was the promise that the Internet would transform business and consumer habits, and make transactions, shopping and access to information more convenient and less expensive.
While some of the hopes have been borne out, and may yet be so, what led to the bust was a realization that the initial promise would not happen overnight, or be as profound as optimists hoped. And, pointedly, there was the recognition that start-ups must be commercially viable, not just good ideas, to be worthy investments.
With the same vigor with which investors embraced Internet start- ups, they shunned them, starting about April 2000. In the last 18 months, there have been only a handful of public offerings from Internet- related ventures.
PayPal, which declined to comment today citing a quiet period mandated by the Securities and Exchange Commission, lets people make payments to each other, and to businesses, over the Internet. To do so, an individual seeking to make a payment visits www.paypal.com and opens a account, depositing money into it with, for example, a check or credit card and then using the account to pay for transactions. The recipient, who also must have a PayPal account, receives an e-mail notification that the payment has been transferred.
PayPal has 12.8 million account holders, with about half its accounts having been active during the first half of 2001, according to company documents. Overwhelmingly, customers use PayPal to pay for online auctions, which account for 68 percent of PayPal's transactions.
In particular, PayPal has ridden the coattails of the success of eBay, one of the few Internet businesses that has lived up to its promise. Individual sellers often heavily favor PayPal's payment mechanism because they are leery of accepting personal checks or cannot accept credit cards.
PayPal also has capitalized on two other successful areas of Internet trade, gambling and pornography, which account for 10 to 15 percent of the company's transactions, according to analysts who cover it. Many sites offering online wagering or pornography also accept credit cards.
PayPal makes its money by taking a cut of a transaction, roughly 3 percent, from the seller. One of the aspects of the business that make it attractive is that it provides a less expensive alternative to other payment methods, like credit cards, which can charge upward of 8 percent for Internet transactions, according to Gwenn Bezard, a research analyst with Celent Communications. He said PayPal had 90 percent of the e-mail payment market.
But such success has invited competition from Citigroup's Citibank, and eBay itself, both of which offer competing transaction methods, and from Mastercard, which has indicated its interest in getting into the business.
And whether PayPal can make a profit remains unknown, given that the company lost $265 million in its first two and a half years in business. However, its loss rate has slowed markedly in recent months.
Adding to the questions, the company had initially planned to go public earlier this month, but postponed the offering after a company called CertCo Inc. filed a lawsuit claiming it had a patent on the online payment system. In the last week, PayPal disclosed that it may be subject to banking regulations in several states, including Louisiana, which informed PayPal last week it must suspend operation in the state until regulators can assess which state licenses the company is required to obtain.
Aaron McPherson, a research manager with IDC, a market research concern, said that despite the obstacles, the company was attractive to investors because it was in a "commanding" position in an emerging market, and was "trending toward profitability." But, the analyst said, another factor in the first day run-up of the stock may be simply that it has been a long time since investors had anything to get excited about.
"There isn't much competition for investor dollars," he said.
Sounds like 1999? It happened today.
PayPal, a Silicon Valley company that lets people pay for goods and services online, became one of the first consumer- oriented Internet start-ups to go public since the dot-com bust, and it did so with notable success. The company, whose stock opened at $13, hit as high as $22.44, before closing at $20.09, raising $70.2 million by day's end.
The response came, on top of everything else, after PayPal delayed its offering for a week after being hit with yet another challenge, a patent lawsuit from a competitor, and having its service suspended by banking regulators in Louisiana.
Given the obstacles confronted by PayPal, the offering's success provoked questions about whether investors were responding to the promise of a single company, or demonstrating a renewed appetite for matters Internet.
Unlike with many past dot-coms, "there is some clarity about how this company is going to make money," said Randall Roth, a research analyst with Renaissance Capital, echoing a view among analysts who cover the industry that PayPal has much to recommend it to investors.
But, Mr. Roth added, the optimism did not seem sufficient to justify the big first- day run-up.
"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."
What fueled the boom, and soaring stock prices, back then was the promise that the Internet would transform business and consumer habits, and make transactions, shopping and access to information more convenient and less expensive.
While some of the hopes have been borne out, and may yet be so, what led to the bust was a realization that the initial promise would not happen overnight, or be as profound as optimists hoped. And, pointedly, there was the recognition that start-ups must be commercially viable, not just good ideas, to be worthy investments.
With the same vigor with which investors embraced Internet start- ups, they shunned them, starting about April 2000. In the last 18 months, there have been only a handful of public offerings from Internet- related ventures.
PayPal, which declined to comment today citing a quiet period mandated by the Securities and Exchange Commission, lets people make payments to each other, and to businesses, over the Internet. To do so, an individual seeking to make a payment visits www.paypal.com and opens a account, depositing money into it with, for example, a check or credit card and then using the account to pay for transactions. The recipient, who also must have a PayPal account, receives an e-mail notification that the payment has been transferred.
PayPal has 12.8 million account holders, with about half its accounts having been active during the first half of 2001, according to company documents. Overwhelmingly, customers use PayPal to pay for online auctions, which account for 68 percent of PayPal's transactions.
In particular, PayPal has ridden the coattails of the success of eBay, one of the few Internet businesses that has lived up to its promise. Individual sellers often heavily favor PayPal's payment mechanism because they are leery of accepting personal checks or cannot accept credit cards.
PayPal also has capitalized on two other successful areas of Internet trade, gambling and pornography, which account for 10 to 15 percent of the company's transactions, according to analysts who cover it. Many sites offering online wagering or pornography also accept credit cards.
PayPal makes its money by taking a cut of a transaction, roughly 3 percent, from the seller. One of the aspects of the business that make it attractive is that it provides a less expensive alternative to other payment methods, like credit cards, which can charge upward of 8 percent for Internet transactions, according to Gwenn Bezard, a research analyst with Celent Communications. He said PayPal had 90 percent of the e-mail payment market.
But such success has invited competition from Citigroup's Citibank, and eBay itself, both of which offer competing transaction methods, and from Mastercard, which has indicated its interest in getting into the business.
And whether PayPal can make a profit remains unknown, given that the company lost $265 million in its first two and a half years in business. However, its loss rate has slowed markedly in recent months.
Adding to the questions, the company had initially planned to go public earlier this month, but postponed the offering after a company called CertCo Inc. filed a lawsuit claiming it had a patent on the online payment system. In the last week, PayPal disclosed that it may be subject to banking regulations in several states, including Louisiana, which informed PayPal last week it must suspend operation in the state until regulators can assess which state licenses the company is required to obtain.
Aaron McPherson, a research manager with IDC, a market research concern, said that despite the obstacles, the company was attractive to investors because it was in a "commanding" position in an emerging market, and was "trending toward profitability." But, the analyst said, another factor in the first day run-up of the stock may be simply that it has been a long time since investors had anything to get excited about.
"There isn't much competition for investor dollars," he said.