PayPal's IPO Is a Success, But Challenges Remain

I n three short years, PayPal became the online payment processing company preferred by e-tailers and businesses. With customers in 37 countries, PayPal has more than 12 million registered users and says its accounts are growing by 18,000 per day. Its e-mail payment system is especially popular with people buying items on Internet auction sites.

The online financial services company allows users to make purchases and bid on auctions, pay bills, and send and receive money by e-mail. For small businesses and Web sites accepting payments online, the risks of fraud and revenue lost to chargebacks are reduced significantly. PayPal hopes to further its efforts in helping businesses transfer funds electronically using its service.

On Feb. 15, 2002, PayPal debuted on Nasdaq, becoming the first Internet stock offering of the year as well as the first successful stock offering in many months from a profitless Internet company. Nearly nine million shares were traded, and they rose in value by 55% the first day, opening at $13 and closing at $20.05.

Investors and IPO market watchers are cautiously optimistic about the significance of PayPal's apparent popularity on the stock market and whether it points toward an overall big-picture recovery.

Its growing customer base doesn't necessarily mean the company's stock value will increase proportionally. Because today's market requires technology companies to be able to prove a financial track record to their investors, a strong first day of trading rarely means long-term gains.

Over its three years of operation, PayPal has accumulated $139 million in cash losses and a net loss of $265 million. Despite the negative flow, the company's revenue growth has been strong, increasing from $8.8 million in the last quarter of 2000 to $40.4 million for the same period of 2001. By the close of business on the first day of trading, PayPal stock had a value of $1.2 billion.

With the additional capital the IPO has created, PayPal intends to buy equipment, improve systems for payment processing and expand its overseas operations.

However, PayPal's IPO also was marked by several mishaps that could affect the company and its stock down the road.

A patent-infringement suit filed by computer security provider CertCo Inc. delayed the IPO by a week and a second patent dispute with another company has not yet gone to court. PayPal may have violated the federally required "quiet period" for companies issuing new stock, and it had to warn investors of potential SEC action.

A class-action lawsuit was filed in Santa Clara, Calif., alleging that PayPal unlawfully restricts its customers' access to their money if fraud is suspected. State banking regulators in New York, California and Idaho are wondering if PayPal is really operating an unauthorized banking service. Finally, regulators in Louisiana informed PayPal that it would need a money-transmission license in order to be allowed to conduct business there.