Pandora Wows Wall Street

Pandora launched its initial public offering Tuesday evening, opening at US$16 per share. On Wednesday morning, the Internet radio’s stock price opened at $20, then rose to $26, placing the company’s value at $4.2 billion. Later on Wednesday, the price fell to $18.30.

Despite Pandora’s lack of profitability, the surge in its share price was expected. The company offered just 9 percent of its shares to the public, and buyers clamored to sop up the limited supply.

The market is still trending a heavy appetite for technology stock. LinkedIn’s shares soared last month during its IPO, going from $45 to $90 in the opening minutes of trading.

Pandora currently has 90 million registered U.S. users and makes its income mainly from advertising. A large chunk of that goes to music licensing. The company spent $29 million on royalties in a three-month period ending in April.

Although Pandora is enjoying today’s excitement, tomorrow it’s back to work, spokesperson Deborah Roth told the E-Commerce Times.

Making Ends Meet

The company has its work cut out for it. With the high costs of licensing music, Pandora has had trouble earning enough to pay the bills.

“Pandora offers a popular service, and its music recommendation engine — Music Genome Project — certainly sets it apart from other Internet radios,” Azita Arvani, principal of the Arvani Group, told the E-Commerce Times.

“But the service comes at a high cost of licensing the music,” she continued, “and the current revenues from advertising and subscriptions have not compensated for the cost.”

Just because Pandora has a large user base, that does not mean it’s very profitable. The overhead of music licenses eats into revenue pretty rapidly.

“But technology companies with high growth potential can be in this situation and steadily grow out of it into profitable pastures,” said Arvani. “However, such a technology company has to be evaluated on its own unique merits and less on the overall market hype. Investing in an IPO like Pandora in public markets is very risky, since a lot of growth is already priced into the current valuation. And popularity does not always translate into profitability.”

Just Another Music Service?

It could be that the market is hungry for technology companies and will devour anything that is thrown at it.

“My reaction is a kind of confusion, really,” Steven Savage, technology project manager and Geek 2.0 blogger, told the E-Commerce Times. “Yes they have some nice technology, but I’m not sure their idea is something to get worked up over to the tune of a hefty IPO.”

Pandora’s technology could set it apart from the rest of the crowded online music scene, though.

“Their music recommendation system is pretty clever, and it appears they’re trying to think out of the box,” said Savage. On the other hand, “they’re limited to the United States in a global age. They’re also a music service, and everyone is doing some music service — even HP is looking to get in on this.”

Another Tech Bubble?

It could be that the tech sector is heading into troubled waters.

“An odd part of the tech market is that there’s a strange fusion of fear-of-bubbles and trying-to-get-into-the-next-big thing,” said Savage. “I think we have potential for a small bubble of some tech stocks, but nothing equal to the enormous disaster of the dot-com era. There’s caution built into the system. I just don’t think it’s enough caution to head off some bad experiences and burst stock values. My cautious take is we’ve got a small tech bubble brewing.”