Shares of Roxio have slumped following concerns that the company was over valued.
American Tech Research analyst Paul-Jon McNealy downgraded the online music service shares saying that Napster is being challenged by increasing competition.
Shares dropped $1.26 to $8.67 on volume of 3.2 million shares, well above the daily average of about 1.2 million shares, according to CBS MarketWatch.
McNealy said: "Roxio's stock has had a run-up over the past month with very little news as it prepares to spin off its consumer software division to Sonic Solutions and its Napster music service gets ready to become a stand alone company.
"We believe that Roxio's valuation is now too high with investors paying 4-times revenue, net of cash, for a business that has not demonstrated profitability or tremendous growth rates."
He implied that the stock should be valued in the $5-$6 range. On Tuesday stock reached a 14-month high of $10.40 in intraday trading.
McNealy said the company would need to generate annual revenue of more than $150 million to be profitable. Analysts surveyed by Thomson First Call are projecting an average fiscal 2005 (ending in March) revenue of $109.9 million.
Roxio reported fiscal second-quarter losses of 44 cents a share in November. This was lower than expected however, analysts had predicted 50 cent losses.