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PayPal Jumps 55% on Stock Offering

TIMES STAFF WRITER

PayPal Inc. shares surged 55% on Friday as the online payment provider became the first Internet company to go public in almost a year and notched the strongest trading debut in nine months.

Analysts warned, however, that the overall market for initial public offerings remains “anemic.” They said fast-growing PayPal, a favorite of EBay Inc.'s auction Web site users, faces a cloudy future because of legal and regulatory questions.

“Two weeks ago, I considered this deal ‘best in show’ for the first quarter. Now all the uncertainty casts a long and dark shadow as to what is going to happen with this company,” said David Menlow, president of IPOFinancial.com, which analyzes new stock offerings.

PayPal’s IPO was delayed one week because of an 11th-hour patent-infringement suit by rival CertCo Inc. The company also has been dogged by regulators in California, Louisiana and other states who are concerned that the company might be operating as an unregulated bank.

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Analysts say PayPal also could face rising competition from the likes of Citigroup Inc.'s payment site C2it.com and EBay’s BillPoint service.

But shares of Mountain View, Calif.-based PayPal surged $7.09 to close at $20.09 on Nasdaq as investors apparently shrugged off any concerns. The company raised $70.2 million late Thursday by selling 5.4 million shares at $13 through lead underwriter Salomon Smith Barney, which is owned by Citigroup. The stock trades under the symbol PYPL.

PayPal had the biggest first-day jump since Simplex Solutions Inc. gained 77% in May. Though such first-day gains often prove to be over-hyped and short-lived, PayPal’s debut was seen as a sign of hope for technology investors.

PayPal is the first Internet IPO since Loudcloud Inc. went public in March. Since the tech stock bubble burst in spring 2000, investors have turned icy toward the sector.

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Like most Internet companies, PayPal is unprofitable, but analysts are impressed by its robust sales growth and status as the leader in its niche. PayPal, which had 12,000 customers at the start of 2000, now has nearly 13 million. Revenue surged from $14.5 million in 2000 to $104.8 million last year.

“P2P,” or person-to-person payments through online services such as PayPal, are expected to grow to $13.2 billion in 2006, up from $2.1 billion in 2001, said James Van Dyke, research director of Jupiter Media Metrix.

Still, PayPal has racked up $277 million in net losses the last two fiscal years, Menlow said.

Though Friday’s trading may indicate investors believe the company can turn a profit in the not-too-distant future, Menlow said a regulatory clampdown or a successful lawsuit could upend its business plan.

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Van Dyke, however, said PayPal could reach an accord with regulators regarding the interest payments it makes on deposited funds, the main point of contention with state officials. That wouldn’t affect PayPal’s core business--transferring money without using a credit card.

Regardless of how PayPal fares, analysts say it’s far too soon to sing “Happy Days Are Here Again” for the IPO market.

“The backlog of deals is still anemic, and we’re off to the slowest start this year in more than two decades,” said Richard Peterson, market strategist at Thomson Financial, noting that only eight companies have gone public in 2002. “The IPO market isn’t like 1999 again--but then again, what is?”

Peterson said the IPO market is still likely to be dominated by multibillion-dollar spinoffs such as Verizon Wireless out of Verizon Communications Inc., Travelers out of Citigroup Inc. and Medco out of Merck & Co. Those deals are expected later this year.

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Peterson warned that strong debut trading offers little or no clue about a stock’s longer-term prospects.

Of the last 10 IPOs to rise 100% or more in their debuts, nine now trade below the offer price, let alone the first-day close.

Menlow also cautioned against reading too much into PayPal’s success.

“I don’t believe this signals the all-clear for Internet IPOs,” he said. “Those people who think there’s a new era for Internet stocks are flirting with their financial well-being.”

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