Pandora Surges in First Day of Trading, but Faces Apple, Amazon and Google Next

Annual Loss Shrank to $1.8 million Last Year as Registered Users Topped 90 Million

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Pandora on the trading floor.
Pandora on the trading floor. Credit: Bloomberg

Pandora Media, the online-radio company, gained on its first day of trading as investors raced to benefit from the biggest surge in internet share sales since the dot-com boom a decade ago.

The Oakland, Calif., company leapt as much as 63% to $26 after its debut on the New York Stock Exchange, under the symbol P. It sold 14.7 million shares yesterday at $16 apiece, raising $234.9 million in its initial public offering.

While Pandora will compete with peers such as Sirius, however, it may face a bigger risk staying ahead of established technology companies including Apple, Amazon and Google, which are investing in their own online music offerings.

Startups such as San Diego-based Slacker Inc. and San Francisco-based Rdio, as well as CBS Corp.'s, also provide competition by offering music through the internet.

Spotify, the 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 to begin a U.S. service, which could start as soon as next month, people with knowledge of the matter said June 13.

Founded in 2000 by Tim Westergren under the name Savage Beast, Pandora makes 87% of its sales from ads that target users based on age, gender, ZIP code and musical taste. Ads support the free radio service, though the company also sells subscriptions to users who prefer to listen without advertising.

The question is whether Pandora can increase revenue enough to comfortably exceed its costs. Some users have started to complain that the service is already running too many ads.

Pandora has lost $92 million since 2000. Its annual loss shrank to $1.8 million last year from $16.8 million a year earlier as registered users topped 90 million. Royalty costs increased 21-fold since 2007 to $69.4 million last year, while revenue jumped to $137.8 million in the same period.

Pandora is among a dozen internet companies to go public this year, the most in any year since the height of the first wave of web IPOs in 2000.

Investors are flocking to technology IPOs after professional-networking website LinkedIn Corp. and Yandex, operator of Russia's biggest search engine, provided first-day gains of at least 55% last month. Pandora was especially alluring after it sold only about 9.2% of its shares outstanding, compared with an average float of 24% for U.S. technology IPOs in the past year.

"It's a small offering in a hot industry," said Josef Schuster, founder of Chicago-based IPOX Schuster, which oversees about $2.5 billion and bought Pandora shares. "That makes it very easy to place a stock."

At the offering price, the company had a market value of about $2.6 billion, or about 19 times last year's sales, compared with about 2.7 times for Sirius XM Radio, the subscription-based satellite-radio service. Sirius XM had a market value of about $7.7 billion as of yesterday's close.

Hearst Corp., the New York-based publisher, planned to sell 4.4 million shares to pare its stake to 2.7% from 5.7%, the prospectus showed. The largest shareholders, Crosslink Capital, Walden Venture Capital and Greylock Partners, didn't plan to sell shares in the IPO.

--Bloomberg News--

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