June 15, 2011

Pandora Opens IPO At $16 A Share

Online streaming-radio service Pandora Media raised $234.9 million in its initial public offering (IPO) pricing shares above an already raised range on Tuesday as investors sought gains from a limited number of new Internet stocks.

Pandora priced its shares at $16 each, according to a source close to the deal. The company raised the $235 million based on 14.7 million shares it planned to sell, according to a government filing. The raise came after Pandora increased the price target at $10 to $12 per share less than a week ago. Shares are expected to begin trading on the New York Stock Exchange (NYSE) on Wednesday under the symbol "P."

The completion of the IPO puts Pandora's market value at $2.6 billion. That is a huge number for a company that has lost $92 million since it started as a music recommendation service called TheSavageBeast.com back in 2000.

Since then, the company has morphed into a music streaming service for PCs, smartphones, and other digital devices. The service tailors to individual tastes of Pandora's 94 million registered members.

The large audience and the amount of time people spend listening to Pandora is the main driver in the increased value of the company's IPO. Pandora will now sit back and see how the general public reacts, as they had the chance to buy stock in the company when the market opened Wednesday morning.

Last month, when business-oriented social networking site LinkedIn's IPO was released, their stock more than doubled on the first day of trading, giving the company a $9 billion market value.

China's Renren and Russia's Yandex have also had strong IPOs, building on the potential success of IPOs from Facebook and Twitter.

"All these guys are trading on potential, not on existing earnings," Wedbush analyst Michael Pachter told Reuters. "I think Pandora's model is going to evolve."

Pandora shares are entering a stock market that has become more unstable amid signs that the economy's recovery is faltering. NASDAQ's composite index has fallen 5 percent since LinkedIn priced its IPO on May 18.

Anyone looking to buy Pandora shares on Wednesday should consider that LinkedIn shares closed Tuesday at $76.34, a 19 percent drop from their first day of trading nearly a month ago.

But Pandora's outlook, and the insider who sold some of their stock, this IPO looks like a number one hit. Before expenses, the offering raised about $96 million for the company, which is based in Oakland. Existing stockholders collected a combined $139 million by selling a total of 8.7 million shares.

The IPO price represents a more than five-fold increase from what Pandora itself though the company was worth six months ago. Pandora's board appraised the stock value at $3.14 per share in December, according to documents filed with the Securities and Exchange Commission. Pandora projected its IPO would go from $7 to $9 per share earlier this month, and then raised it to $10 to $12 per share just last week.

The one thing Pandora has going for it is that it commands a huge amount of listening time by its members -- nearly 3.8 billion hours worth overall. That number could more than double this year if its audience grows at the same pace in the three months ending in April.

As more people spend more time listening to Pandora, the service becomes a more compelling market vehicle. Like most Internet services, Pandora makes most of its money from advertising. It also offers paid subscription service to those who want to skip the ads.

However, Pandora still has not been able to earn enough money to cover its costs, which consists mainly of royalties that it pays to play music. As more people listen to music, the royalty rate also rises.

Pandora lost $1.8 million on revenue of $138 million in its last fiscal year. Pandora's content acquisition costs ate up about half of the revenue. While revenue in the first quarter of the current fiscal year more than doubled from last year, so did its losses.

"We don't believe Pandora has constructed a moat in the face of powerful music labels and an unproven revenue model, particularly versus the competition," according to investment research group Morningstar.

Pandora will compete on the market with peers including satellite radio service Sirius XM Radio, music service Rhapsody, and other music storage companies such as Apple, Google and Amazon. Also, startups such as Slacker Inc, Rdio Inc, and CBS Corp's Last.fm, are providing competition by offering music through the Internet.

Spotify Ltd., a London-based online music provider that's available in seven European countries, has reached agreements with three major record labels and is close to a deal with a fourth that would bring the service to the United States, which could start as soon as next month, according to sources familiar with the deal.

Pandora may have a hard time staying afloat in these waters.

Underwriters on the IPO were lead by Morgan Stanley, JPMorgan and Citi.


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