Back to previous page

Pandora IPO feeds fear of dot-com bubble

By Cezary Podkul,

Internet radio provider Pandora Media saw its shares jump 9 percent during their first day of trading on the New York Stock Exchange on Wednesday, becoming the latest online stock to enjoy a strong public offering and fueling fears of another dot-com bubble.

The company, which lets listeners create customized radio stations based on their favorite artists or songs, offered 14.7 million shares at $16 each, more than doubling an initial pricing range of $7 to $9. The shares opened at $20 and briefly touched $26 before ending the day at $17.42, a price that values Pandora at nearly $2.8 billion.

The successful offering confirms investor interest in a new generation of Internet stocks that have captivated consumers with innovative models for networking, and creating and sharing content online. LinkedIn more than doubled during its initial public offering last month, which valued the professional networking site at nearly $9 billion after its first day of trading.

Since then, Internet coupon provider Groupon filed for a $750 million initial offering, and reports surfaced that online game maker Zynga may soon follow suit. And the giant of the social networking world, Facebook, is expected to go public in the next year with a valuation that could reach $100 billion.

But the companies’ earnings have not kept up with their popularity among investors willing to pay top dollar to participate in their initial offerings. LinkedIn, for instance, booked a net income of only $15.4 million in its last financial year, or about 0.2 percent of its current $7 billion market capitalization, which is the total value of all outstanding shares. And Pandora lost $1.8 million in its latest financial year ended January, according to a regulatory filing.

“There is a bubble now because the valuations, even though they’re not runaway, at this point, they’re excessive,” said David Menlow, president of IPO Financial, a New Jersey-based provider of research on initial public offerings. But, with the market in a “runaway mentality,” Menlow’s company still placed buy ratings on both LinkedIn and Pandora before their offerings.

“They’re both overvalued,” he concedes.

Some even fear a return to the run-up in Internet stock prices of the late 1990s, when just about any company with a dot-com at the end of its name could find favorable pricing and surge in value.

“It brings back memories,” said Jeremy Siegel, professor of finance at the Wharton School of the University of Pennsylvania and author of investing classic “Stocks for the Long Run.” “It is not as extreme as it was, but it is still a concern.”

Siegel cautions investors interested in this generation of Internet stocks to think about the price they’re paying for them relative to their earning potential — and to be prepared to weather any losses should the market sour.

“My advice is to be very careful, and if you’re going to invest in these, only put these in your speculative part of your portfolio where you should be prepared to lose a substantial part of your investment,” Siegel said.

But not everyone is seeing signs of a bubble. Scott Sweet, who has been observing initial public offerings for 38 years as senior managing partner at Florida-based research firm IPO Boutique, thinks the market still has some way to go to catch up to the dot-com bubble of the late 1990s.

“I’ve seen IPOs up a lot more than LinkedIn and Pandora,” he said. “It doesn’t mean we’re in a bubble.”

© The Washington Post Company