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Pandora IPO Has Interesting First Day

June 16, 2011

Pandora shares on Wednesday initially soared as the Internet streaming music service made its debut on Wall Street, surging 48 percent in early trading before settling back down to $20.05 per share by mid-afternoon, and then closing at $17.42.

The online radio company set its IPO at $16 per share before trading began and quickly raised $235 million in its first day on the market, with a total market value of $2.55 billion at its offer price. The closing price marked a 9 percent increase over the company’s initial IPO price.

While those investors who bought shares at the IPO price are still ahead, almost anyone who bought shares during market hours on Wednesday will most likely experience a loss.

A total of six million shares were offered by Pandora while another 8.7 million were presented by company stockholders.

Pandora’s opening-day performance shows that investors have shown great enthusiasm for new stock offerings from rapidly growing Internet services, despite the recent market slump. The excitement began to build after business-oriented social networking site LinkedIn doubled its shares in its first day of trading last month. Now, with Pandora’s success, it looks like that enthusiasm could stretch out to other larger Internet companies looking to jump in the IPO game, including Facebook, Groupon and Zynga.

“Everyone seems to be getting gold-rush fever,” analyst Phil Leigh of Inside Digital Media, told Associated Press (AP). “People are starting to believe they can find gold in every stream or around every hill, but that’s not the reality.”

Joseph Kennedy, CEO of Pandora, said he would not allow his 360-employee workforce to get caught up in the madness. “I am not jumping up and down right now,” he said on Wednesday in an interview with AP’s Michael Liedtke. “I just see this as another step toward building a great company.”

Kennedy owns 4.2 million shares in his company, worth an estimated $74 million.

Pandora, which got its start as a music recommendation service back in 2000 under the name Savage Beast Technologies, morphed into an online tailored music-streaming site in 2005. The concept of offering a personalized radio station for each listener has been a hit with music lovers, helping Pandora reach 94 million registered users.

The Oakland, CA-based company is now making deals to offer its services in cars, just like what Sirius XM Radio has already accomplished. But unlike subscription-based Sirius, Pandora gets 85 percent of its revenue from advertising. The rest comes from subscribers who pay a $36 annual fee to listen to their music ad-free.

Pandora’s main problem currently is that its revenue has not grown fast enough to cover the royalties that it pays to offer the music. The rates go up as Pandora attracts more listeners. The company has lost a total of $92 million in its short time on the air, including a $6.8 million loss during the first three months of the current fiscal year.

“Unless they can continue to increase their subscribers or offer new material, obviously their losses will continue to grow,” Scott Sweet, managing partner of IPOboutique.com told AP.

In an interview with the CNBC business network, Kennedy said the company, which lost $11 million last year, has been improving operational margins and cash flow.

Kennedy said, however, there was no timeline to turn a profit in his company, though more listeners should eventually attract ad dollars. He added that Pandora will keep advertising as its main source of revenue for now — similar to traditional radio — even though it does offer a subscription plan.

However, “we will never do anything like the 12 or 13 minutes of advertising that characterize broadcasting radio today,” he noted.

“We are tremendously focused on providing a great listener experience and that’s what has gotten us to this point,” Kennedy told Reuters.

Kennedy also said that Pandora, which is currently only available in the US, has global ambitions. “Our vision is for Pandora to be a global service but we have to go country by country,” he said. “We see global opportunities in the long run.”

US automaker Ford began integrating Pandora into selected models last year and other automakers are following suit.

Pandora is also facing potential competitive threats from a host of powerful tech companies including Apple, Amazon and Google, which are all offering services to store people’s personal music collections on remote computers so the songs can be played on any device with an Internet connection.

It wouldn’t be a surprise if any of those three companies expanded their music offerings to include a music recommendation service similar to Pandora’s, said analyst Martin Pyykkonen of Wedge Partners.

“There isn’t a big barrier to entry in this market,” said Pyykkonen.
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