NEW YORK Pandora Media Inc shares soared as much as 48 percent in their market debut as investors shrugged off fears that the online radio service might never turn a profit.
The stock opened at $20 on Wednesday -- implying a market value of about $3.2 billion -- and later traded as high as $23.75 before falling back to $18.19, up 14 percent amid a broader market downturn.
The company is trading at about 21 times its 2010 sales, far above the market values of Google Inc, Amazon.com Inc and Sirius XM Radio Inc.
"If investors are investing in the hope that maybe Pandora can figure it out, that's not an analytical framework to make an investment," said Morningstar analyst Rick Summer, who has a $6 price target on the stock.
"The reason we're so bearish is that Pandora has no competitive advantages and the valuation is crazy," he said.
Pandora Chief Executive Officer Joseph Kennedy told Reuters there was no time line to get to profitability.
"We are tremendously focused on providing a great listener experience and that what has gotten us to this point," Kennedy said.
Online social media start-ups have stoked the interest of investors who are anticipating the public debuts of Facebook and Twitter even as big companies like Ally Financial are having trouble going public.
LinkedIn Corp, another hot debut, is still trading above its IPO price, but at $74 a share it is down nearly 40 percent from its peak. The professional networking site, which went public in May, warned that it would not turn a profit this year.
Groupon, which filed to go public earlier this month, incurred a loss of $146.5 million for the first three months of the year as it spent heavily to expand, the online daily deal site said in a filing.
The buzz surrounding Internet companies has caused concern that an investor bubble, similar to the one that wiped out Internet start ups like Pets.com in 2001, is looming.
"It's too early to start throwing around the b-word," said GreenCrest Capital analyst Anupam Palit. "In 12 to 18 months when we have more follow-ons, like IPOs from Groupon, Zynga and Facebook, then we'll know more."
Pandora, which has been around for a decade, runs a service that recommends and plays music, allowing listeners to create playlists based on a song, artist or genre.
Users can listen to music through computers, smartphones and devices that hook into home entertainment centers such as the Roku box. Pandora has also struck up partnerships with Ford Motor Co, General Motors Co, Mercedes-Benz and other automakers.
"Pandora is incredibly enticing at a surface level because millions and millions of people are using it," said Lazard Capital Markets analyst Barton Crockett. "I think there is a love factor that is getting investors interested in it."
With 90 million registered users in the United States, Pandora makes money mainly from advertising, and it has to pay significant royalties for music.
Kennedy said Pandora planned to keep advertising as its main source of revenue -- similar to traditional radio companies -- even though the company offers a premium subscription service.
"We will never do anything like the 12 or 13 minutes of advertising that characterize broadcasting radio today," he said.
So far, the cost of maintaining the service is outpacing its revenue growth.
"As each user listens to it more and more, Pandora gets charged more and more," said Morningstar's Summer. You don't get any operating leverage in that model."
Pandora is going up against traditional radio companies, satellite radio provider Sirius XM, music services such as Rhapsody, not to mention services from Apple Inc, Google and Amazon that allow users to access music from anywhere.
"Their business model has to evolve," said Maxim Group analyst John Tinker.
But Tinker initiated coverage of Pandora with a "buy" rating and $23 price target, noting that other companies with high programming costs, such as Netflix Inc, have succeeded.
Founded in January 2000, as TheSavageBeast.com, the company changed its name to Pandora Media five years later.
The company racked up net operating losses of $92.1 million over the 10 years that ended this past April, according to a government filing.
For the three months ended on April 30, Pandora reported revenue of $51 million with a net loss of $6.8 million.
On Tuesday, the company raised $235 million from its IPO, which priced at $16 a share. It had increased its target price range to between $10 and $12 late last week.
(Reporting by Jennifer Saba and Liana Baker; editing by John Wallace, Chelsea Emery and Lisa Von Ahn)
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