The 11-year-old company recently raised the value of its offering 48 percent to $161.5 million from the initial amount of $109.5 million. It follows on the heels of business social network LinkedIn's IPO, which saw its stock jump over 90 percent in the first day.
Though Pandora has experienced huge spikes in user engagement after the introduction of its mobile app, with 34 million users listening to the site an average of 11.6 hours each month, the decade-old site is not yet profitable.
According to the numbers in its S-1 filing with the SEC, Pandora lost $1.8 million in 2010 with revenues of $137.8 million. Pandora's business model lets users listen for free with ads, or to pay for premium service without ads. Eight-seven percent of revenue derives from advertising, but only 1 percent of listening hours serves ads, compared with 20 percent on traditional radio.
The Wall Street Journal pointed out that despite being able to attract new listeners, the site has continued to lose money, largely due to the rising costs of fees it must pay for content:
As the number of hours that users listen grows quickly, so too do the royalties Pandora must pay to stream music. With advertising generating 90% of sales, the tricky part is selling radio spots fast enough to keep up with costs. And royalty fees are scheduled to rise each year through 2015.
Pandora will also have to compete with a growing number of competitors in the digital music space. Aside from other radio-style online sites like Last.fm and Slacker radio, subscription-based streaming sites like Rhapsody and RDIO, as well as cloud-based music services offered by big names like Apple, Google and Amazon crowd the field and threaten to divert listeners from Pandora.
“When you don’t know how aggressive competition is going to be, but there are a lot of very well-financed players attacking the space, the risk is tremendous,” an analyst told Bloomberg.
Though considerable excitement has been generated for tech companies in the wake of LinkedIn's IPO--and in anticipation of Groupon's IPO--critics warn that these challenges should keep investors cautious.