PayPal shares make strong debut

PayPal's IPO risky business? David Menlow, president, IPOfinancial Network

Online payment company PayPal got off to a wild start on its first day as a public company, rising as much as 54.5 percent Friday.

The 5.4 million share offering opened at $15.41, more than 18 percent above the $13 price set by underwriters Thursday night. The stock closed at $20.09, making a 54.5 percent gain.

PayPal had been scheduled to go public earlier this month, but was forced to delay the offering after it was hit by a lawsuit over patents.

PayPal's service allows consumers to make payments to one another over the Internet. A payer deposits money in a PayPal account using a credit card, bank account or existing PayPal account. PayPal can then cut the recipient a check for the amount or transfer the money to another bank account. The recipient can also leave the money in the PayPal account, where it earns interest.

The service is extremely popular for person-to-person transactions such as auctions, and eBay customers make up the bulk of PayPal's users. According to the company's prospectus, 63 percent of dollar volume for transactions in the first nine months of 2001 came from settling auction purchases, particularly on eBay.

Although PayPal is popular, it isn't yet profitable. In the quarter ended Dec. 31, PayPal lost $18.54 million on sales of $40.4 million, compared with year-ago losses of $41.9 million on revenue of $8.8 million.

While the opening price may seem like an incredible boom, the stock could have gone even higher had it not been for the bad news that emerged in the past week, according to David Menlow, president of IPOfinancial.com.

"We could have seen this opening with a double-digit premium," he said.

PayPal tried to dismiss concerns about the lawsuit last week, saying it was a deliberate attempt to disrupt its initial public offering. The suit, filed by privately held online security company CertCo, alleges that PayPal's technology violates a CertCo patent.

PayPal said in a filing with the Securities and Exchange Commission that CertCo's patent was issued two years ago, and PayPal started offering its service for more than two years ago.

But the lawsuit wasn't the only troubling sign for investors. PayPal also disclosed in SEC filings that Louisiana had asked the company to stop offering its service to state residents until it gets a license to do business there. PayPal said it has a license to transmit money only in Oregon and West Virginia and is applying for similar licenses in 14 other states, including its home state of California.

Menlow said the disclosures could cause some investors to be cautious on the stock.

"I was a fan and I still believe all problems listed in the prospectus were being addressed or will be addressed by company," he said. "But until such time as there is clearer resolution to these issues to where they no longer look as explosive or detrimental, the stock could be a train wreck waiting to happen."