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Pandora's Pox?

Pandora's Pox?

It's not unusual for a newly public company like Pandora to soar then founder in its first few days, or even weeks, on the market. But at the moment, it's unclear whether Pandora's woes are an in-process value correction or whether they indicate deep concern on the part of investors about Pandora's ability to grow -- and the state of tech stock in general.

By Rachelle Dragani
06/17/11 9:17 AM PT

Internet radio provider Pandora has taken a harsh beating in its first few days on Wall Street. After a short-lived initial pop that boosted its share value from its debut of US$16 to a peak of over $24 on Wednesday, shares sunk sunk throughout the day Thursday and into mid-day Friday, where they hovered around $13.

Pandora, which provides online personalized radio streams based on user preferences, announced Wednesday that it would offer 14.7 million shares of common stock at $16 per share.

Like many tech stocks that have recently issued or are currently flirting with IPOs, Pandora's hype and apparently over-optimistic valuation were likely factors in the pummeling Pandora took on the market.

Tough Market for Pandora

It's common for recently debuted stock to be fickle in the early days of trading, especially for a company like Pandora, whose IPO was surrounded by anticipation.

"The first couple weeks there is volatile trade because they're not trading based on the fundamentals, but more on investor interest and potential," Bill Buhr, IPO strategist for Morningstar, told the E-Commerce Times.

But while there may be a jump to a steadier price, a crowded marketplace, advertising woes and too-high valuations on tech companies that still aren't seeing a profit could put Pandora in trouble for the long-term.

"In spite of the buzz Pandora might enjoy, the company is hardly guaranteed to be rolling in profits any time soon. The fact that it closed lower than its opening price on its first day of trading is evidence that investors are less willing to dive whole-hog into a tech stock regardless of its reputation," Lee Simmons, industry specialist from Hoover's editorial team, told the E-Commerce Times.

One concern investors have is the wide variety of competing music providers that reach listeners through newer channels. Besides Pandora's many rivals in Internet radio, competition includes Sirius XM satellite radio and new cloud music services that give users access to entire music libraries via a mobile device like a smartphone.

"For a company like Pandora, which is playing in the newer Web 2.0 field, competition becomes much more important because the market and technology are changing so quickly. The careful investor will read Pandora's prospectus and plainly see that competition is a major threat and that the company does not foresee an imminent profit," said Simmons.

Although Pandora is a front-runner in the online radio business, there is concern over whether its services are unique and innovative enough to keep it ahead or drive profit.

"Pandora was the first mover in this, and I think they've taken advantage of that, but they don't really have a competitive advantage, and ultimately that can really catch up to them," said Buhr.

Another concern is the focus the company places on advertising -- an industry that has seen its fair share of woes in recent years.

"Pandora derives 87 percent of its revenue from advertising. The fact that it's so heavily dependent on one revenue stream should give any investor pause. While the company's targeted ad approach may work in the long run, it's a risky bet if the firm has no plan to grow subscribers or find some other 'plan B' for making money down the road," said Simmons.

Pandora has not expressed a comment after the first day of trading and did not respond to the E-Commerce Times request for comment by press time.

Not the Only Tech IPO to Tank

Pandora joins social networking site LinkedIn as a tech stock whose IPO was highly publicized and targeted high, only to take a strong dip upon hitting the market amid investor fears of profitability.

Online coupon provider Groupon -- another not-yet profitable company -- has filed for an IPO valued around US$20 billion. Social networking leader Facebook is widely expected to be doing the same in the near future.

These deals have been highly analyzed and discussed in the investment community. There's worry the hype and high valuations around tech stocks is eerily reminiscent of the late-'90s tech bubble, and there's fear that another could burst.

"This IPO highlights how much focus there is now on tech, it reminds me a lot of the late '90s when companies weren't profitable but were traded based on metrics, and we're seeing that a little bit again," said Buhr.

"People never learn lessons," added Buhr.


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