Pandora shares soar in first day of trading
Posted: 1:19 pm Wed, June 15, 2011
SAN FRANCISCO — Internet radio station Pandora Media’s IPO struck the right chord with investors Wednesday despite the static in the overall stock market.
Pandora’s stock surged by as much 63 percent in their market debut before pulling back later in the session. The shares closed at $17.42, still a decent gain amid the market’s broader decline. It marked a 9 percent increase from Pandora’s initial public offering price of $16 and a nearly six-fold increase from what Pandora’s own board thought the stock was worth just six months ago.
The performance shows the recent market slump hasn’t dampened the enthusiasm investors have for new stock offerings from rapidly growing Internet services.
The excitement began to build after shares of professional networking site LinkedIn Corp. more than doubled on their first day of trading last month. Now it looks like the fervor could escalate into an outright mania as even bigger Internet companies such as online coupon seller Groupon Inc., Web game maker Zynga and the biggest star of all, Facebook, go public during the next year or so.
“Everyone seems to be getting gold-rush fever,” said analyst Phil Leigh of Inside Digital Media. “People are starting to believe they can find gold in every stream or around every hill, but that’s not the reality.”
Pandora CEO Joseph Kennedy said he won’t allow his 360-employee company to get caught up in the hysteria.
“I am not jumping up and down right now,” Kennedy said in a Wednesday interview. “I just see this as another step toward building a great company.”
Kennedy, 51, owns 4.2 million Pandora shares, a stake now worth about $74 million.
The warm Wall Street reception for Pandora pegged the company’s market value at $2.8 billion. That’s already more than the $2 billion market value of AOL Inc., an Internet pioneer hailed as a next great media powerhouse at the height of the dot-com boom 11 years ago.
Around the same time, Pandora was just starting out as a music recommendation company then known as Savage Beast Technologies.
Pandora adopted its current name in 2005 when it morphed into a new type of radio station that streams music over the Internet. What makes Pandora different from broadcast radio is that it can employ computer formulas to learn each of its individual listeners’ tastes in order to create personalized song lists.
The concept has been a hit with music lovers, helping Pandora build an audience of 94 million registered users who mostly listen to the service on home and office computers and mobile phones. The company, based in Oakland, Calif., is now striking deals to supplant traditional radio stations in cars, just as satellite service Sirius XM Radio Inc. already has done.
Unlike the subscription-driven Sirius, Pandora gets about 85 percent of its revenue from advertising. The rest of its revenue comes from subscribers who pay $36 annually to hear higher-quality sound without commercial interruptions.
Pandora’s biggest problem so far has been that its revenue is not growing fast enough to cover the royalties that it pays to play music. Those rates go up as Pandora attracts more listeners.
Pandora has suffered an uninterrupted string of losses totaling $92 million in its short lifetime, including a $6.8 million loss during the first three months of its current fiscal year before accounting for dividends on preferred stock.
“Unless they can continue to increase their subscribers or offer new material, obviously their losses will continue to grow,” predicted Scott Sweet, managing partner of IPOboutique.com.
But Pandora’s revenue is rising rapidly, more than doubling in its fiscal first quarter to $51 million. If it can maintain that growth pace, Pandora’s revenue for the fiscal year ending next January would be about $325 million.
That means Pandora’s market value stands at 8.5 times its projected revenue. By comparison, Sirius’ market value of $7.7 billion is about 2.5 times its anticipated revenue for this year.
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