Pandora Media Inc. fell, erasing yesterday’s gain, amid concern that competition may stymie efforts by the online-radio company to reach profitability.
The Oakland, California-based company declined $1.31 to $16.11 at 1:03 p.m. in New York Stock Exchange composite trading. The stock earlier dropped as much as 11 percent to $15.50. The company raised $234.9 million in an initial public offering on June 14.
Pandora’s increase on its debut gave it a $2.8 billion market capitalization. That valued the company at about 20 times last year’s sales, compared with 2.7 times for rival Sirius XM Radio Inc. Pandora has struggled to convert users of its free, ad-based radio service into paying customers. At the same time, larger companies such as Apple Inc., Google Inc. and Amazon.com Inc. are investing in their own online-music services.
“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.”
Internet IPO Surge
Investors snapped up Pandora at its debut to take advantage of the biggest surge in Internet share sales since the dot-com boom a decade ago. A dozen Internet companies have gone public this year, the most in any year since 2000, at the height of the first wave of Web IPOs.
Pandora also benefited from limiting the number of shares available for purchase in the initial sale to about 9.2 percent of those outstanding, compared with an average float of 24 percent for U.S. technology IPOs in the past year.
“By restricting the offering, they’re creating a feeding frenzy,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees about $60 billion and doesn’t hold Pandora. “That helps the buzz, whether or not those valuations stay on the shares.”
The Internet company sold 14.7 million shares at $16 apiece in its IPO. That was above the top of the planned range of $10 to $12.
While Pandora already competes with peers such as Sirius, a subscription-based satellite-radio service, it may face a bigger risk staying ahead of Apple, maker of the iPhone and iPod, and other established companies that are investing in their own online-music offerings.
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 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.
“The faltering we’ve seen in Pandora is likely to cause investors to exercise more careful scrutiny of future IPOs in that space,” Gayle said. The share drop “reminds us that these IPOs are not guaranteed moneymakers.”