August 15, 2022

DealBook: Pandora Shares Climb in Debut

Justin Sullivan/Getty ImagesJoe Kennedy, Pandora Media’s chief executive

Shares of Pandora Media, the online music service, jumped at the market opening as investors embraced the latest Internet company to go public.

Shares of the initial public offering, priced at $16, opened at $20 and continued to rise modestly in morning trading on the New York Stock Exchange. At nearly $23 a share, the company is valued at about $3.7 billion.

Like many of its peers, Pandora repeatedly defied expectations in the run-up to its I.P.O. On Tuesday evening, Pandora priced its offering several dollars above its target price range of $10 to $12. The company sold 14.7 million shares, raising $234.9 million, at a valuation of $2.6 billion. Its underwriters, Morgan Stanley, JPMorgan Chase and Citigroup, also have the option to sell an additional 2.2 million shares.

Pandora — and the many Internet companies waiting to go public over the next 12 months — are riding a wave of optimism on the back of better-than-expected debuts for technology stocks. These young start-ups, many of which are not yet profitable, are capitalizing on the increasing demand for fast-growing consumer Internet companies — especially those with a social component.

The euphoria troubles some analysts who say it is reminiscent of the dot-com era, when investors piled into companies with flimsy business models at sky-high valuations. Although today’s crop of companies have real business models that are generating significant revenues, many are not yet profitable. Pandora, for example, is wildly popular with more than 90 million users, but it recorded a loss of $1.8 million last year. The service has never posted an annual profit.

The euphoria moved into high gear on May 19, when LinkedIn’s shares more than doubled on their first day of trading. A few days later, shares of Yandex, often described as the Google of Russia, climbed more than 55 percent on their debut.

Pandora’s first day is so far more modest, but still reflects the sector’s strength. In early June, the company had previously forecast a range of $7 to $9 per share.

Not all I.P.O.’s are prospering, however. The broader market for public offerings has been more mixed. The commodities giant Glencore, for instance, had a splashy debut in May with a $10 billion offering, but is currently trading below its offer price

“What’s interesting to me about Pandora is that it illustrates the broader trend of this year’s tech I.P.O. market,” said Ira Cohen, a managing director at Signal Hill. “The I.P.O. market is a place of the haves and have-nots.”

For Pandora, its popularity is something of a double-edged sword. It pays significant royalties to record labels to stream songs and as users spend more time on the service, the fees rack-up.

“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 securities filing.

According to analysts, Pandora will continue to struggle with profitability until it significantly increases the number of ads it serves and improves the way those ads are targeted.

Success in that area, however, may also alienate some of its users, who use Pandora because of its lack of ads.

And there are competitors. Several technology giants, including Google, Amazon and Apple have recently expanded their digital music services. Upstarts like Spotify, a streaming music service that is popular in Europe, also threaten Pandora’s market share.

In a filing, Pandora acknowledged the looming threat posed by its competitors, which could “devote greater resources than we have available, have a more accelerated time frame for deployment and leverage their existing user base and proprietary technologies to provide products and services that our listeners and advertisers may view as superior.”

“There’s a lot of competition, especially with Spotify expected to launch in the U.S. soon,” said Richard Greenfield, an analyst with BTIG Research. “I think there will be a lot of ways to get in the car.”

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