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Pandora shares opened at $20 on Wednesday -- implying a market value of about $3.2 billion -- and later traded as high as $23.75 before giving back some of those gains.

The company is trading at 24 times its 2010 sales, far above the value placed on Google, Amazon and Sirius XM.

"I think it's heavily overvalued," said Anupam Palit, an analyst with GreenCrest Capital. "It's a great company but what we're seeing right now is incredible investor demand for Internet IPOs and a lot of dollars chasing very little supply."

Pandora follows a handful of other Internet companies such as professional networking site LinkedIn and online daily deal site Groupon, which filed to go public earlier this month.

Online social media start-ups have stoked the interest of investors who are anticipating the public debuts of Facebook and Twitter, despite a broader downturn of other large IPOs like Ally Financial.

LinkedIn, another hot debut, is still trading above its IPO price, but at $74 a share it is down nearly 40 percent from its peak.

"It's too early to start throwing around the 'b-word,'" GreenCrest Capital's Palit said, referring to a potential bubble. "In 12 to 18 months when we have more follow-ons, like IPOs from Groupon, Zynga and Facebook, then we'll know more."

Pandora, which has been around for a decade, runs a service that recommends songs to listeners based on member feedback, allowing them to create playlists based on a song, artist or genre.

Users can listen to the service through computers, smartphones and devices that hook into home entertainment centers such as the Roku box. Pandora has also struck up partnerships with auto manufacturers including Ford General Motors and Mercedes-Benz.

With 90 million registered users in the United States, Pandora makes money mainly from advertising and it has to pay significant royalties for music.

So far, the cost of maintaining the service is outpacing its revenue growth.

Pandora is going up against traditional radio companies, satellite radio provider Sirius XM, music services such as Rhapsody, not to mention services from Apple, Google and Amazon that allow users to access music from anywhere.

Founded in January 2000, as TheSavageBeast.com, the company changed its name five years later to Pandora Media.

The company said it has "incurred significant net operating losses" over the decade totaling $92.1 million as of the end of April 2011, according to a government filing.

For the three months ending April 30, Pandora reported revenue of $51 million with a net loss of $6.8 million.

(Reporting by Jennifer Saba and Liana Baker; editing by John Wallace and Chelsea Emery)