Pandora Media Inc. showed that investors' appetite for new Internet-related stocks remained rabid as the company priced its initial public offering at $16 a share, far above expectations.
The online radio service and its private investors raised $235 million Tuesday as they rode the latest wave of interest in Internet-related businesses, particularly those focused on digital entertainment and social networks.
The excitement for Pandora's offering may stoke investors' hunger for even bigger players that either have filed to go public, such as online daily-deal service Groupon Inc., or are expected to do so in the next 12 months, such as Zynga Inc., Twitter Inc. and Facebook Inc.
Pandora's IPO price was about double the level expected in April when the firm initially forecast a price range of $7 to $9 a share. Last week, it increased the range to $10 to $12 a share.
The IPO values the company at more than $2.4 billion. The stock will begin trading Wednesday on the New York Stock Exchange under the ticker symbol "P."
The stage for Pandora was set by other hot Internet company IPOs this year that have evoked memories of the dot-com boom of the late 1990s.
Last month, professional-networking firm LinkedIn Corp. debuted at $45 a share amid intense demand from large and small investors alike. LinkedIn shares rocketed as high as $122.70 on their first day of trading May 19 and closed at $94.25, more than double their IPO price.
Less than a week later, Internet search-engine firm Yandex — dubbed Russia's Google — went public at $25 a share and shot up 55% to close at $38.84 on its first trading day.
Now, as in the late-1990s boom, the issue of setting a rational valuation on the stocks "is just thrown to the wind," said David Menlow, a veteran IPO analyst who heads research firm IPOfinancial.com in Millburn, N.J.
"Greed is certainly a big factor," Menlow said, as investors clamor to get into a hot market.
Still, analysts note that many of the current crop of technology companies, unlike their counterparts more than a decade ago, have been in business for years and already have racked up substantial revenue growth. Many also have turned at least modest profits, a rarity among the start-ups of the late-1990s.
Pandora, however, still is in the red, though the Oakland company's net loss last year shrank to $1.8 million from $16.8 million in 2009. For its fiscal first quarter ended April 30, it lost $6.8 million on revenue of $51 million.
Scott Sweet, managing partner at research firm IPOboutique.com, said it was likely that many investors who couldn't get Pandora shares in the IPO would jump in to buy once the stock began trading. But he said savvy investors probably would flip their shares quickly if the price soars in the market.
Part of Pandora's allure is its commanding share of the burgeoning market for Internet radio. The firm allows users to create personalized radio stations. Its 90 million registered users have logged billions of hours on the service, giving it a 51% share of the market, according to GreenCrest Capital Management.
Longer term, the concern with Pandora is its prospect for turning a profit. The company, founded in 2000 as a kind of academic research project, has lost money since introducing its service in 2005. That's largely because of the fees and royalties it's required to pay to music labels and publishers, which last year came to $69.5 million, about half its revenue. Those fees are up for negotiation at the end of 2015.
The vast majority of Pandora's revenue, about $138 million last year, came from advertising. A small number of Pandora's listeners pay a monthly fee for premium service without the ads, providing the company with about $18.4 million in revenue.
"No doubt, it's a great company," said Anupam Palit, an analyst with GreenCrest. "But they face several big challenges."
To command higher ad rates, Pandora needs to be able to target its listeners more narrowly, Palit said.
"Amazon knows everything you've bought online. Google knows all about your Internet life," he said. "Pandora knows your name, age and what you like to listen to. They need to know a lot more."
Pandora also needs to evolve its ads from those that depend on users sitting in front of their computers to an audience that's highly mobile.
"Most of their users aren't seeing the ads on their mobile devices, which are more often than not sitting inside their pockets," Palit said.
And it has rivals such as Slacker Radio, Last.fm and even conventional radio giant Clear Channel Communications Inc. making inroads in Internet radio, giving consumers more options for digital music.
Pandora's business is one "with few barriers to entry, especially from companies that have far greater resources," Sweet said.
Amazon.com and Google Inc., for instance, have recently launched services that let users upload their digital music collections and be able to listen to them from an array of Internet-connected devices. And Apple Inc. is preparing a similar service.
Though Pandora's shares seem poised to surge Wednesday, recent trading of LinkedIn and Yandex shares cautions against rushing into the first trading sessions of new Internet stocks.
LinkedIn shares have fallen each week since the firm's IPO, and closed Tuesday at $76.34 — 38% below the peak price of $122.70 on the first day of trading.
Yandex shares closed Tuesday at $31.60, down 19% from their close on the first trading day.