Will PayPal's IPO Thrive in a Harsh Market?

Poor PayPal. Unlike scores of Internet companies before it, the online payment company is about to go public in a realistic market environment.

Worse, the company is coming out into a market watched as closely by lawyers as it is by investors, where even the slightest hint of a first-day run-up could raise all kinds of suspicions.

Worse yet -- maybe worst of all -- PayPal cannot share the spotlight with another Internet company. It cannot hide behind a rival offering or get help shouldering an enormous burden. The world is watching, and PayPal has nowhere to hide.

Diminished Expectations

Nevertheless, PayPal is going to pull it off. As usual, the key is not to achieve some objective milestone for a first-day closing price or to attract a certain number of institutional buyers. PayPal's goal is to beat expectations.

On that front, the company has an advantage. Even people who can remember when Internet IPOs involved 500 percent first-day increases know that those days are over.

The only way PayPal can fall short of expectations is to fall flat on its face, and that's not going to happen.

Whether PayPal will avoid a bad outcome for logical reasons or not is another question.

The company is not profitable, though some believe it is close. Instead, it has first-mover advantage. And it's a well-known brand. Does any of this sound familiar? It should. These are the phrases that drove the IPO gold rush a few years ago.

Logic and Reason

PayPal does add some wrinkles to the typical dot-com mix, including a business model that has a solid base of users and fans as well as a viral marketing element. If you want the money from your EBay auction, or if you want to buy that Pez dispenser, you'll probably have to sign up.

But those aren't the reasons why investors will be calling their brokers later this week to place buy orders -- although they may call from pay phones or speak in low whispers for fear they'll be overheard buying tech stocks.

The arguments in PayPal's favor may help justify those purchases, but they are not the driving force behind the buys. People will buy PayPal because they still believe the Internet is going to revolutionize the world.

True Believers

They may not admit it anymore at cocktail parties. They might even have a hard time saying the words to their reflection in the mirror. But none of that makes it any less true.

Of course, institutional investors drive the stock market, and PayPal may get a chillier reception from them.

There are plenty of Internet stocks already out there, after all, with lower price tags than PayPal's expected offering price of US$12 to $14. Some have even posted profits already. Some dominate their markets, thanks to early-mover advantage.

But those stocks are yesterday's news. And individual investors can follow their hearts as easily as they can use their heads.

Later this week, PayPal will be the new kid on the block. Not just any new kid, but one with a potentially bright future. Sure, the other new kids eventually got knocked down and had sand kicked in their faces; but that doesn't mean it will happen to PayPal, does it?

At least for a while, everyone will want to call PayPal their friend.

What do you think? Let's talk about it.