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Pandora Fizzles After Hot IPO Debut

Pandora story updated with closing prices

NEW YORK ( TheStreet) -- Pandora (P - Get Report) shares dropped more than 20% Thursday, falling below their initial pricing level just a day after the company's strong public debut.

Shares of loss-making company closed at $13.26, significantly below its offer price of $16, despite hitting a high of $26 on Wednesday.

Pandora's dismal performance is in sharp contrast with other recent Internet IPOs, which have experienced similar dramatic gains in their debuts and have held up fairly well since then.

LinkedIn (LNKD - Get Report) saw shares more than double on its first day of trading, and Yandex (YNDX) -- the so-called Google (GOOG) of Russia -- jumped more than 40% in its U.S. trading debut just several days later.

While shares of both companies have cooled somewhat since then, they are still trading significantly above their offer prices.

Pandora's IPO is a reality check for Internet investors following months of speculation about the beginning of a new tech bubble. This concern has heightened as some of Internet's biggest names like Facebook and Groupon prepare for near term initial public offerings.

Pandora's IPO, however, proves that only companies with sound financials will stand up in the public markets, said John Fitzgibbon, president of IPO Scoop.

"It's a classic case of sizzle versus steak," he said. "The sizzle came yesterday in the form of but the focus has shifted to the company itself -- the steak."

Pandora, which had a net loss of $1.8 million last year, is facing skepticism about its ability to turn a profit as well as its power to fend off stiff competition from tech giants that are also breaking into the online music space.

Pandora is up against a new initiative from Apple (AAPL - Get Report), which last week unveiled its iCloud service that will let users stream their music across multiple devices, rather than having to synchronize gadgets.

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Amazon (AMZN - Get Report) also introduced its Cloud Drive service, an Internet service that lets customers store music and play it on their smartphones or computers.

Another significant problem facing Pandora: the sustainability of its business as its popularity grows.

The company will be forced to increased pay royalty fees to music labels as its user base expands. And as more listeners gravitate to Pandora's mobile app, the company will need to further utilize audio ads which aren't as lucrative as display ads, said Tom Taulli, an independent IPO analyst.

Pandora raised $235 million in its IPO Tuesday, selling shares at $16 a piece. It was valued at $2.8 billion based on its closing price Wednesday.

--Written by Olivia Oran in New York.

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