NEW YORK (Reuters) - Investors learned a hard lesson on Wednesday about red-hot Internet companies: they can go cold very quickly.
Shares in the latest Internet IPO sensation, Pandora Media Inc, surged 48 percent in early trade but then reversed course and closed below their opening price on the New York Stock Exchange as doubts increased about whether the online radio service would ever turn a profit.
While those who bought at the IPO price are still ahead, almost anyone who bought shares during market hours on Wednesday are now nursing a loss.
One major concern about Pandora: The bigger its audience gets, the more it must pay record labels in licensing fees, hurting the mostly free radio service’s chances of becoming profitable.
Chief Executive Joseph Kennedy said there was no timeline to turn a profit, though a larger audience should eventually attract advertising dollars.
“We are tremendously focused on providing a great listener experience and that’s what has gotten us to this point,” Kennedy told Reuters in an interview.
The stock closed the day at $17.42, above its IPO price of $16 a share, and bucking the broader market sell-off. Pandora had previously increased its target price range to between $10 and $12.
Still, with a market value of $2.8 billion, equivalent to about 20 times last year’s sales, some analysts think Pandora’s price is still too rich. Amazon.com Inc and Sirius XM Radio Inc for example, both trade at about three times 2010 revenue.
“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,” Summer said.
Online start-ups have stoked the interest of investors who are anticipating the IPOs of Facebook and Twitter even as big companies like Ally Financial are having trouble going public.
But can these companies keep pace with outsized growth expectations? LinkedIn Corp, the professional networking site that went public in May, warned it won’t be profitable this year and Groupon, which filed to go public earlier this month, posted a quarterly loss on rising costs.
“It’s too early to start throwing around the b-word,” said GreenCrest Capital analyst Anupam Palit, referring to a bubble. “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 allows listeners to create music playlists. It has about 90 million registered users.
“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.”
Kennedy said Pandora planned to keep advertising as its main source of revenue — similar to traditional radio — even thought it 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 up against traditional radio companies, satellite radio provider Sirius XM, music services such as Rhapsody, and offerings from Apple Inc, Google and Amazon.
Founded in January 2000 as TheSavageBeast.com, the company changed its name to Pandora Media five years later. It racked up net operating losses of $92.1 million over the 10 years that ended this past April, according to a government filing.
Reporting by Jennifer Saba and Liana Baker; editing by John Wallace, Chelsea Emery, Lisa Von Ahn and Phil Berlowitz