The Moat That Grows With Every UserBy Joel Litman, chief investment officer, Altimetry
 The online auction world used to run on trust and crossed fingers...
Buying something on eBay (EBAY) at the turn of the century meant mailing a check or money order to a stranger. The seller wouldn't ship a thing until the payment cleared – often days, sometimes weeks later. If anything went wrong, there was no safety net. And the system worked fine... until it didn't. A small band of engineers and entrepreneurs saw the flaw. They were determined to create a solution in the form of digital payments. Most early contenders missed the mark, though... Offerings like "DigiCash" and "CyberCash" promised futuristic platforms, complete with encryption layers and experimental currencies. But as much as users wanted reliability and speed, they didn't like change. Folks didn't want to abandon payment methods like credit cards. So while the rest of corporate America tried to reinvent the wheel... one startup found a better way.Its platform let folks send money to anyone with an account. All you needed was an e-mail address. The money could come from your bank account or credit card. Instead of creating a new kind of money, this startup figured out how to move the old kind... fast. And it was willing to pay people to do it. New users got $10 just for signing up and linking a bank account. Another $10 went to anyone who referred a friend. The campaign spread like wildfire. By March 2000, the startup was handing out $10 million a month just to get people in the door. It was a genius marketing gimmick. But the company didn't stop there... While other platforms were fighting to find an audience, PayPal (PYPL) had found eBay... Many of eBay's sellers were part-time hustlers or weekend entrepreneurs. These folks latched onto the idea of instant payment. And they passed that preference straight to their buyers. Every successful auction became a mini sales pitch. Sellers encouraged customers to use PayPal. Buyers signed up to get their goods faster. Each referral spun the wheel again. Between January and March 2000, PayPal's user base exploded. Growth hit 7% to 10% per day. Less than a year earlier, eBay had paid $86 billion for its own payment solution, Billpoint. But users weren't interested in eBay's in-house payment system. PayPal had the scale. It had the trust. And once folks started using it, they didn't want to switch. Talk about buyer's remorse.
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PayPal went public in February 2002. It was turning a profit within months. And that summer, eBay threw in the towel... paying $1.5 billion to buy the very company that had outcompeted its in-house product. By rewriting the payment rules, PayPal became the default trust layer for online transactions. It built a "network effect" that's still hard to disrupt. The more people use PayPal, the bigger it gets... and the more folks have to keep using it. The network effect has created some of today's biggest companies... Meta Platforms (META) is a classic example... it owns social networks like Facebook and Instagram. The more popular these platforms are, the more people want to join them. Likewise, credit-card network operators Visa (V) and Mastercard (MA) still process most of the world's payments because almost every store accepts their cards. The same logic applies: The more places the cards can be used, the more folks want to use their cards. Even chipmaking titan Nvidia (NVDA) benefits from a network effect. The company's proprietary operating software, CUDA, is the industry standard for developing AI models amidst the ongoing AI boom. The more developers build on CUDA, the richer its ecosystem of tools and libraries becomes... pulling even more developers and enterprise customers in. And since CUDA only runs on Nvidia's chips... more CUDA users translates to more chip sales for Nvidia. Businesses with sustainable network effects tend to last for a long time... and their stocks tend to reflect their respective networks' popularity. If you can find a business in the early stages of developing a network effect, it has a high chance of beating the market. Regards, Joel Litman
June 5, 2026
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