Analysts: PayPal IPO Should Pay Off

"The signs are there that they will continue to be successful," Gartner analyst Avivah Litan told the E-Commerce Times. Litan expects the IPO to be successful, but "not the wild kind of success we saw a few years ago."

The company plans to offer 5.4 million shares priced between US$12 and $14.

Web Pay Standard

According to analysts, PayPal has done a good job of cornering the online payment market.

"People will move to online financial services if they improve the physical world, and PayPal is a great example of that," Giga Information Group analyst Penny Gillespie told the E-Commerce Times.

In a study released Tuesday, Gartner said PayPal is likely to expand beyond the person-to-person market and become the electronic cash standard for Web purchases.

Of 1,000 U.S. online consumers surveyed, 33 percent said they consider PayPal a "highly trusted" provider of payment services; 27 percent already use the company's services; and 8 percent plan to use PayPal for future purchases.

"Overwhelming market lead and brand awareness position PayPal as the company most likely to establish the long-awaited and critical e-cash standard for Internet purchases, especially for items less than $50," Litan said.

Ahead of Competition

PayPal does face competition, including Yahoo! PayDirect, Citibank's c2it, Western Union's MoneyZap, the U.S. Postal Service's CheckFree and a joint venture between EBay (Nasdaq: EBAY) and Wells Fargo. But Litan said PayPal "already has too much of an early-mover advantage."

Gartner found that just 11 percent of online shoppers use EBay's payment system, while 3 percent use Yahoo's service and 1 percent use c2it.

Movin' On Up

Although it has four times as many personal customers as business accounts, PayPal gets most of its revenue from transactions paid by merchants, and those transaction fees are going up.

According to a filing with the U.S. Securities and Exchange Commission, the average fee in the fourth quarter was 3.2 percent, up from 2.1 percent a year ago.

Most of PayPal's business customers are small, but once the company reaches 25 million users -- up from 13 million today -- large e-tailers may be forced to accept PayPal as an alternative to credit card payments, Litan said.

Credit cards currently are used in more than 93 percent of online payment transactions.

Out of the Red

Despite strong revenue, PayPal has yet to book a profitable quarter. For the fourth quarter, the company reported $40.4 million in revenue -- a 357 percent increase over the year-ago period -- but had a net loss of $18.5 million, compared with a loss of $41.9 million in the fourth quarter of 2000.

Litan expects PayPal to get out of the red in the first quarter with a profit of about $3 million.

Speed Bumps

Even if it can post a profit, PayPal faces other obstacles.

"They are moving a lot of money and they are getting too big to fail, so regulators are starting to look at them more carefully," Litan said.

Four states, including California and New York, are considering regulating PayPal.

PayPal also depends heavily on EBay. In the first nine months of 2001, the company said, 68.3 percent of payments were made through an auction site, primarily EBay. That may cause concern among investors, since PayPal has no contract with the auction giant and, in fact, has a majority stake in a competing payment system.

Gillespie said PayPal may have a problem if its ability to process auction payments is somehow curbed, but she does see other opportunities.

"There are a lot of other auction houses besides EBay," Gillespie said. "I don't think it's totally far-fetched that we would see online providers accepting multiple payment methods, as they do with credit cards."