One day, Wall Street is telling us Pandora is the golden goose. The next day, it's a turkey.
How could sentiment about the stock change that quickly?
"That's a difficult question to answer," said Lee Simmons, editor of Hoovers, an IPO research service in Austin, Texas.
In fact, I have yet to find anyone who can explain the head-spinning shift in conventional wisdom about Pandora's prospects.
This is not just about Pandora. This turnabout should be sounding alarms across Silicon Valley because there may be no better way to kill the tech IPO market than the appearance of any kind of funny business that stirs the echoes of dot-com bubble shenanigans.
If investors believe tech IPOs are a game for insiders and banks to make a buck, then many local tech companies may have to kiss their IPO dreams goodbye.
Indeed, there are growing signs investors are growing wary of tech IPO offerings. There have been 19 in 2011, according to Renaissance Capital. And so far, as a group, those stocks are down 2 percent on the year, according to Matt Therian, a Renaissance research analyst.
a high-flyer like LinkedIn is coming back to earth, with its shares down from $94.25 a share on the first day of trading to $67.81 on Tuesday.
Pandora sold its IPO stock at $16 a share, and they climbed as high as $25 on the first day of trading before closing at $17.42. The stock has fallen three out of four days since, to close at $13.50 Tuesday.
It's not just the drop, however, but the speed at which it occurred that sets Pandora apart. By the second day of trading, some analysts were setting a price target for the stock of $5 to $6 a share. Richard Greenfield, a securities analyst at BTIG, set a target of $5.50 a share. In a note to clients, Greenfield wrote:
"Pandora is a great consumer music service, but its business model does not scale in the same way as other successful Internet businesses."
There are all sorts of red flags contained in Pandora's filings. For instance, the rates that Pandora pays music companies go up as more people listen to more music. In other words, the more people use the service, the more unprofitable it becomes. Pandora hopes to overcome that by massively increasing the amount of ads it sells, but it's anyone's guess as to whether the company can pull that off.
Defenders of Pandora note that the company's revenues surged 150 percent last year. And they note that despite potential competition from companies like Apple (AAPL), there is huge opportunity still ahead for Pandora if it can strike deals to get embedded into car stereo systems.
"There are a lot of positives that may have gotten overwhelmed," Therian said. "I think there is still a lot of opportunity for them to grow the business."
But here's the thing: The good and the bad were clearly disclosed to investors in the filings before the company went public. No new startling information emerged after the IPO. And yet in the weeks before the IPO, the company said there was a such a surge in demand for shares that it raised the offering price from a range of $7 to $9 to $16 while also selling an extra 1 million shares.
Why were these investors so excited in the face of all these warnings? Were they just caught up in the growing hype following the LinkedIn IPO? Were they hearing something in the IPO road show? And why did they head for the hills right after the IPO?
A spokesman for Morgan Stanley, the bank that led Pandora's IPO, declined to comment. I contacted Pandora, but the company is still in a post-IPO quiet period, according to spokeswoman Deborah Roth, who emailed me a statement:
"Going public hasn't changed our business. We remain focused on the listener experience and building a long-term company that will provide for that."
The closest anyone could come to offering an explanation had to do with the amount of shares Pandora offered. The company sold less than 10 percent of its shares to the public, compared with a typical range of 20 to 25 percent for tech IPOs. By creating an artificial scarcity before the IPO, the company was able to dramatically raise the price, which in turn created more buzz and demand.
"By making available less than 10 percent of the total shares, that created a feeding frenzy," Simmons said.
The problem is this was one of several strategies used during the dot-com days to guarantee those huge, first-day surges in trading. While this is perfectly legal and clearly disclosed to investors, it still creates a misleading perception that demand is higher than it really is.
To be clear, I'm not implying that anyone has done something illegal here. I'm arguing that tactics like this one, which can lead to short-term benefits, can create long-term problems. For the latest updates PRESS CTR + D or visit Stock Market news Today
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