BREAKINGVIEWS - Pandora IPO pop highlights purity of Internet hype

Wed Jun 15, 2011 10:46pm IST

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-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By Jeffrey Goldfarb

NEW YORK (Reuters Breakingviews) - Pandora Media's initial public offering pop showcases the purity of the latest Internet hype. The online radio firm's stock surged as much as 50 percent after pricing at double the original expectations. It has much in common with this year's crop of dot-com darlings, whose shares have tumbled following robust debuts. But Pandora didn't even need fanciful accounting gimmicks to make its case. This is full-blown froth.

There's no arguing with Pandora's sex appeal. Its bespoke music service has attracted over 90 million listeners -- quadruple its audience just two years ago. The latest quarterly revenue of $51 million more than doubled last year's figure. The IPO pricing matched the trajectory. Pandora and its bankers first reckoned the shares would fetch about $8 apiece. After the range advanced to as high as $12, they priced at $16 and eventually traded up to almost $24, making Pandora worth $3.8 billion at one point on Wednesday.

But that valuation wasn't derived from any obvious fundamentals. Like Renren, the Chinese social network that floated earlier this year, Pandora remains unprofitable. It has racked up $92 million of operating losses since its inception in 2000, or about $1 for every user. And like Demand Media and LinkedIn before it, Pandora allotted less than 10 percent of its shares to public investors, which plays to a euphoric market squeeze.

Follow the dotted line and Pandora can be expected to track its IPO predecessors in the market. LinkedIn's shares still trade above where they started but are off a quarter from their peak. Those of Renren, Demand and Russian search engine Yandex also surged on their first day of trading but are now lower than even the original offer price.

But while Renren revised some user figures just ahead of its share pricing, Demand made some aggressive accounting decisions and Groupon is now using smoke and mirrors to define profitability, Pandora presented a clean version of its challenging financial tale in its prospectus. It made plain the company is a money loser -- and may remain so. Even that wasn't enough to help investors see clearly.

CONTEXT NEWS

-- Pandora Media, the Internet radio service, priced its initial public offering at $16 a share, higher than a recently raised target range whose upper end was $12. The sale valued the company at about $2.6 billion. The shares surged nearly 50 percent to as much as $23.75 apiece when they started trading on June 15 on the New York Stock Exchange.

(Editing by Rob Cox and Martin Langfield)

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