Pandora Media Inc. fell below its initial public offering price in its second day of trading amid concern that competition may hinder the streaming radio company’s potential for growth.
The Oakland, California-based company declined 24 percent to $13.26 as of 4:15 p.m. on the New York Stock Exchange after climbing 8.9 percent yesterday. The company raised $234.9 million in an IPO on June 14.
Pandora failed to hold the value investors gave it in its IPO this week even as professional-networking site LinkedIn Corp. trades 52 percent above its May offering price and Yandex NV, Russia’s most popular search engine, is 22 percent higher than its IPO price last month. Pandora’s competitors include satellite radio service Sirius XM Radio Inc. (SIRI) as well as online music services from Apple Inc. (AAPL), Google Inc. (GOOG) and Amazon.com Inc. (AMZN)
“The barriers to entry are not very high, and the innovation is really taking place at the speed of light,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $49 billion. “They are very susceptible to changing technology and changing consumer preferences.”
‘Array of Competitors’
Pandora gained a market value of $2.6 billion, or about 19 times last year’s sales, selling 14.7 million shares for $16 each. The company had originally offered 13.7 million shares for $7 to $9. Sirius trades at about 2.7 times last year’s sales.
Richard Greenfield, an analyst at New York-based BTIG LLC, initiated coverage of Pandora with a “sell” rating today, with a one-year price target of $5.50, citing risks from competition and inadequate earnings growth.
“Pandora has been the ‘survivor’ in Internet radio, but we believe digital music will have a wider array of competitors over the coming year,” Greenfield said in a research note today.
While Pandora already competes with peers such as Sirius, it may face a bigger risk staying ahead of Apple, Google and Amazon, which are investing in so-called cloud music offerings that allow users to store their digital music collections remotely.
Startups such as San Diego-based Slacker Inc. and San Francisco-based Rdio Inc., as well as CBS Corp.’s Last.fm, also provide competition by offering music through the Internet.
Spotify Ltd., 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 on June 13.
Founded in 2000 by Tim Westergren under the name Savage Beast, Pandora makes 87 percent of its sales from advertisements that target users based on age, gender, home postal code and musical taste. Ads support the free radio service, and the company sells subscriptions to users who want to listen without advertising.
Pandora, which has struggled to convert users into paying customers, has lost $92 million since 2000. The 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.
LinkedIn, based in Mountain View, California, booked $15.4 million of net income last year and more than doubled in value on the first day of trading following its IPO. Yandex, based in Moscow, has had net income every year since at least 2006, according to its regulatory filings.
“There was a good track record of performance out of the gate more recently, and Pandora’s faltering performance reminds us that these IPOs are not guaranteed moneymakers,” said RidgeWorth’s Gayle. It “is likely to cause investors to exercise more careful scrutiny of future IPOs in that space.”
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