Tech-Bubble Bursting? Pandora Sinks Below IPO Price

That sound you’re hearing is the Internet stock-bubble bursting.

Pandora Media’s shares tumbled more than 20 percent Thursday, one day after the streaming music service’s stock leapt in its initial public offering.

Pandora trader wearing single symbol P on his jacket at the NYSE
Pandora trader wearing single symbol P on his jacket at the NYSE

Pandora’s wild ride began Wednesday. After soaring more than 50 percent from its opening price of $20, shares of the highly anticipated IPO dropped back below $20 later in the session as the broad market tanked. Pandora's shares closed at $17.42 on Wednesday and at $13.26 on Thursday, well below the IPO offering price of $16.

"Investors determine the stock price. Let the market work," Joseph Kennedy, Pandora’s chief executive, told CNBC Wednesday on the New York Stock Exchange floor.

Following LinkedIn’sstunning debut last month, investors have been looking for the next big Internet darling, with many speculating about the potential valuations of Facebook, Twitter and Groupon.

CNBC reported earlier this week that Facebook is likely to go public by the first quarter of 2012, with a valuation of as much as $100 billion.

But some of the froth came off the market when Pandora's shares pulled back sharply. Rising concerns about Pandora’s ability to turn a profit have some analysts questioning its market valuation, even at its current level. Pandora’s service allows users to listen to the radio through their computers, smartphones and other devices.

“The initial excitement is wearing off and people are starting to see that this company isn’t worth anywhere near its current valuation,” said Anupam K. Palit, a senior equity analyst at GreenCrest Capital LLC.

Pandora’s $16 offering price was twice as much as the popular, but unprofitable, Internet radio service anticipated just two weeks prior. Palit believes the stock will likely sink to that earlier valuation, saying he expects its shares to fall to $7.50.

Others believe its shares will fall even farther. On Wednesday, BTIG initiated coverage of Pandora with a "sell" rating, with a one-year target price of $5.50.

"We believe Pandora’s share price is overvalued based not only on our forecasted earnings trajectory, but also due to significant competitive risks," BTIG said in a research report. "Pandora has been the 'survivor' in Internet radio, but we believe digital music will have a wider array of competitors over the coming year. Social media is also not in Pandora’s DNA—when was the last time a friend of yours shared a playlist with you on Pandora?"

Steven C. Cortes, founder of Veracruz LLC, suggested on CNBC Thursday that Internet stocks in general are suffering from the broad market's move to a more defensive posture. "I'm not a big fan of these IPOs," he said. "This is just not the environment for these glamorous names to come to market."