Judging a stock bubble via IPO jumps

After watching LinkedIn and Pandora go public, I’ve been amazed at the press coverage.

To recap, LinkedIn’s stock took off like a rocket – opening at $45/share and immediately jumped to the $90s. Meanwhile, Pandora opened at $16/share and “only” jumped about 10%. 

It was the NY Times article that caught my eye, I.P.O. Fever Calms Down for Pandora. I saw this headline repeated over and over in many papers and news websites.

It implies that because the stock didn’t jump in price, investors are wary of technology IPOs. Why is the press simply focusing on the stock price increase and decrease?

Let’s take an analogy. If you sell me your used car for $1000 and minutes later (milliseconds for the stock market) I sell it to someone else for $2000, what does that have to say about the market for cars, new or old? Nothing.

Is there market demand for Pandora? Of course! At its IPO, the company is valued at $2.8 billion without any profits. Even though the price has slid since the IPO, its valuation continues to be very rich, primarily because it doesn’t have any profits.

As for my analogy above, what does it imply? If you asked for advice to determine the value of your car, the advice was terrible. In the case of LinkedIn, that advice came from Morgan Stanley and Merrill Lynch.

This article is the beginning of a series about the financial industry. I’ll post an article every couple weeks; stay tuned.

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