July 13, 2024

DealBook: Pandora Prices Its I.P.O. at $16 a Share

A music analyst at Pandora internet radio.Peter DaSilva for The New York TimesA music analyst at Pandora internet radio.

The online music service Pandora may not be profitable, but that hasn’t discouraged investors clamoring for a piece of it.

Pandora Media on Tuesday priced its initial public offering at $16 a share, above its recently raised target range. The company, whose shares will start trading on the New York Stock Exchange on Wednesday under the ticker “P,” has raised $234.9 million, valuing the business at $2.6 billion.

It will sell 14.7 million shares in its market debut, but its lead underwriters, Morgan Stanley, JPMorgan Chase and Citigroup, have the option to sell an additional 2.2 million shares.

It is a big step up for Pandora, which has increased the size of its offering twice in the last month. Last week, the company raised its price target by about $3 a share, to $10 to $12.

The demand for Pandora, a company from Oakland, Calif., that is facing increasing competition from the likes of Amazon and Apple, underscores the market’s heady exuberance for consumer Internet companies. The service, which allows users to build custom radio stations online, has swelled in recent years.

According to its latest filing, the company has more than 90 million registered users and is adding a new user about every second.

Yet, despite its rapidly growing user base, the start-up has struggled to produce a full-year profit.

Revenue more than doubled last year, to $137.8 million, but it recorded a loss of $1.8 million.

“The excitement for Pandora is driven by people’s usage of the service and the enjoyment of the service,” said Richard Greenfield, an analyst with BTIG Research.  “But in order to justify a high valuation, they need to get far more advertising and they need to get more people paying for the service.”

Popular but unprofitable has become a common refrain on Wall Street, as more and more young Internet companies race to the public markets.

In part, start-ups are feeling confident in the wake of LinkedIn’s debut in May. Shares of LinkedIn, a professional social network, roared out of gates and more than doubled on their first day of trading. The company eked out a profit last year, but posted notable losses in 2008 and 2009.

The market is also eagerly awaiting the arrival of Groupon, the daily deals site that has already attracted more than $1 billion from venture capital and institutional investors. The site recorded strong growth last year, in revenue and number of subscribers, but its loss topped $450 million amid hefty marketing expenses. The company, which filed to go public earlier this month, may be valued as high as $30 billion in its offering.

“Silicon Valley is just vibrating with excitement right now,” said Bo Brustkern, a managing director at Arcstone Equity Research. “It is reminiscent of 1999, but somewhat different. Valuation bubbles are constrained to just a few segments so far.”

Pandora’s venture capital backers stand to reap a windfall from the offering. Its top three shareholders include Crosslink Capital, which will own 21.9 percent after the offering, Walden Venture Capital, which will own 17.8 percent, and Greylock Partners, which will hold a 13.4 percent stake.

It is a particularly lucrative moment for Crosslink, which is converting a $33 million investment into a stake worth roughly $560 million.

Despite recent investor interest, Pandora’s journey to the public markets has been a rocky one. At several points in the company’s history, a public offering seemed unlikely. The streaming music service has endured several hardships, including severe budget shortfalls and a 2007 showdown with the music industry over royalties.

The fees it pays to record labels for songs remain its largest expense. The cost to acquire content more than doubled last year to $69.4 million.

“As the volume of music we stream to listeners increases, our content acquisition expense will also increase, regardless of whether we are able to generate more revenue,” the company warned in its latest filing.

Article source: http://feeds.nytimes.com/click.phdo?i=0b7963863129b18e24e785e8f7802eea

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