The signs of a bubble in newly floated consumer internet stocks intensified as shares in Pandora, a lossmaking online music service, briefly soared by more than 60 per cent when trading began.
The big gains followed the 170 per cent first-day “pop” in shares of the LinkedIn business social networking site last month, and stoked concerns that a combination of ignorant private investors and financial opportunists on Wall Street was feeding an unsustainable spike in some initial public offerings.
“Given what happened with LinkedIn, there’s a lot of exuberance in these stocks,” said Lise Buyer, an adviser on IPOs in Silicon Valley. “What happens on the first day doesn’t matter, it’s entertainment.”
Some other recent hotly anticipated IPOs, such as Renren, dubbed “China’s Facebook” by promoters, have fallen back heavily. Renren’s shares were priced at $14 and soared to $24 when trading began early last month, but have since fallen below $8. LinkedIn has slipped 39 per cent from its peak level.
Pandora’s shares fell back to trade at $17.42 by the close in New York, still up 9 per cent and nearly double the maximum $9 price Pandora said two weeks ago it expected to get for its stock.
The euphoria and share price jumps have been fed by private investors rushing to buy shares in companies with familiar consumer brands, as well as by the small amount of stock that companies such as Pandora have put on sale, Ms Buyer and other analysts said.
Private investors’ being sucked into newly traded internet companies has also drawn financial investors into the fray. Hedge funds have pushed the banks underwriting the IPOs for allocations of stock so they can quickly “flip” the shares at a profit. That has quickly been followed by short selling by speculators who bet that share prices will fall, with more than 14 per cent of LinkedIn’s outstanding shares shorted, according to Data Explorers.
“The number one lesson is, if your banker gives you an allocation, grab it — you’ll have the ability to trade out right away and still make a lot of money,” said Espen Robak, president of Pluris Valuation Advisors.
The strong demand for Pandora came despite the fact that it has yet to turn an annual profit in the decade since its founding, and about half its sales revenue is eaten up by fees paid to music companies.