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Unfriendly future for PayPal
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February 15, 2002: 4:36 p.m. ET
The return of the Internet IPO -- haven't we learned anything?
By Adam Lashinsky
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SAN FRANCISCO (CNN/Money) - Hurray for PayPal. Besieged by patent litigation, losing gobs of money and facing stiff competition, the company nevertheless went public Friday. It had revenues of $105 million in 2001, but it's now worth more than $1 billion. Its shares soared 55 percent to $20, from the $13 institutional investors paid Thursday night.
What's so special about PayPal? In a sense, nothing. It's just another unprofitable -- albeit promising -- startup that's trying to innovate an old industry: folks paying other folks for goods delivered and services rendered. (The company's service is popular, for example, for people buying and selling on eBay.)
What is special, from the IPO world's perspective, is that PayPal's $70 million offering is the first consumer Internet IPO in 16 months. Therefore it has tongues wagging and hearts hoping for a revival of the good 'ole days, when worthless companies suddenly -- and briefly -- had value, at least enough for insiders and investment pros to cash out.
The Street's excitement was evident in a Wall Street Journal headline on Friday: "The IPO World Holds Its Breath As a Dot-Com Comes Calling." But it's worth taking a moment to consider how ridiculous the notion of an "IPO World" is. There was a time when IPOs were ho-hum events to which the general public paid no never mind. They were financing opportunities for young companies, no different really than if they borrowed money from a bank, or issued bonds.
But with the Internet boom came the idea of an IPO as a get-rich-quick-scheme, complete with its own Web sites, faux experts and other hangers on.
When IPOs became ends instead of means to an end -- in other words, getting rich rather than financing a company's growth -- the result was a ton of lousy analysis feeding the venture capital-investment banking-entrepreneurial confidence game. The Journal, for example, quotes "Wall Street analysts" asserting that "properly valuing PayPal is tricky because the company has few comparable rivals."
That's bunk. If PayPal starts generating profits on its revenue, it'll be easy to put a value on the stock. And that value won't be $10 or $15 for every dollar of sales.
Understand that the IPO experts are a big part of the confidence game. The San Francisco Chronicle on Friday quoted an analyst with Financial DNA (whatever that means), a research firm in San Francisco speculating PayPal's shares would pop Friday -- he was correct -- and that "the pop would have been even bigger were it not for the company's legal and regulatory problems."
That sort of rubbish about "pops" is just what got us here in the first place. PayPal offered investors just 9 percent of its shares -- 5.4 million shares out of a total 59.8 million. That guarantees that there'll be a scarcity of shares for months. If we learned nothing else over the past two years, it's that the laws of supply and demand were not repealed. When the supply in PayPal's shares increases -- as employees sell to take advantage of the rich stock price -- demand will soften.
Will investors learn to be cautious this time around? If Friday's stock activity is any measure, the answer appears to be no. Some people have to learn the hard way.
Send e-mail to Adam at adam_lashinsky@timeinc.com.
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