When the online radio company Pandora debuted on the New York Stock Exchange earlier this month, its share price soared, boosting the value of the Oakland-based firm to US$2.8 billion—a figure more than 20 times its sales in 2010. But within a week, the stock had plummeted from a high of US$25 back to US$13.50. This blip left many market-watchers scratching their heads and underscores the difficulty even seasoned analysts face when valuing today’s much-hyped tech firms. Are they really worth billions, or are we seeing hints of the exuberance and inflated prices of a new 1999-style dot-com bubble?
Several other tech companies have experienced similar jumps after going public this year. When social networking site LinkedIn opened on the stock market in May, the value of its shares shot up by more than 100 per cent. Now, its share price is back down close to where it started. Despite the temporary frenzy such surges have created, the shares of the 19 tech companies to go public this year have dropped by two per cent overall, according to Renaissance Capital.
Still, more giants of the online world are preparing to go public, including online bargain dealer Groupon, which some analysts predict will be worth as much as US$15 billion on the stock market. HomeAway, a vacation-home rental site, is also hoping to cash in on an investment surge. The New York Times reported that HomeAway will be pricing its shares between US$24 and US$27, bringing the company’s value to over US$2 billion.
Even when companies may not be profitable—neither Pandora nor Groupon are in the black yet—many investors have been enticed by their rapid growth. “People are trying to figure out what the growth trajectory of these companies will be,” CMEA Capital’s Saad Khan told Investor’s Business Daily. “These companies have crazy ramps that go from zero to billions in revenue so quickly.”
The jury is still out on whether these are the signs of another dot-com bubble. Many analysts contend the Internet offers much room for growth. Others argue the value of tech enterprises is being inflated, setting the stage for an imminent collapse of share prices. It wouldn’t be the first time.