Pandora, the music streaming company, has been valued at $2.6bn (£1.6bn) after pricing shares for its US initial public offering at a higher-than-expected $16 each, with investors rushing to buy stock despite concerns over its business model.
The company, which will start trading on the New York Stock Exchange on Wednesday, raised $235m on Tuesday, selling 14.7m shares at $16 according to a government filing.
Late last week Pandora increased its original price range of $7-$9 per share for its IPO to $10-$12 – the latest sign of a company looking to take advantage of the investor enthusiasm for internet companies.
The pricing of the loss-making Pandora equates to 19 times the $137m in revenue the company made last year and values it at about $2.6bn. Pandora reported revenue of $51m, with a net loss of $6.8m in the three months to the end of April.
LinkedIn, the social network for business professionals, floated last month at more than 30 times its revenue. The company saw its valuation rocket to $8.5bn (£5.3bn) after its market debut – $5bn higher than had been anticipated.
Earlier in June daily deal site Groupon filed for its IPO announcing an intention to raise an estimated $750m on the stockmarket. Other internet companies such as China's Renren and Russia's Yandex have had strong stock market flotations.
Investor frenzy for digital and technology companies is likely to reach its zenith early next year when Facebook is expected float with a report earlier this week claiming a valuation of "at least" $100bn.
Pandora has 90 million registered users in the US and makes money mainly from advertising, with significant costs for music royalties to record companies – it paid out $29m in the first quarter.
While investors have taken the chance to buy shares, Pandora faces competition on numerous fronts, including from satellite radio provider Sirius, music services such as Rhapsody and cloud storage services from Apple, Google and Amazon. And Spotify's long-awaited US launch is said to be close.
Richard Greenfield, an analyst at BTIG, has warned that such competition makes Pandora a risk for investors.
"As consumers we love Pandora," he said in an analyst's note. "[However] investing in Pandora is a whole different story. While Pandora is creating a large active user base, its reach/frequency continues to pale in comparison to terrestrial radio, as does its profitability. Put simply, the revenue/earnings leverage from growing users/usage is simply not enough to scale earnings relative to the IPO's proposed valuation."
Tuesday's offering saw Pandora raise $96m and existing shareholders by selling shares benefit $139m. Publisher Hearst, which had a 5.7% stake, raised $69m in the sale. Hedge fund King Street Capital sold $24m worth of shares.
The Pandora chief executive, Joseph Kennedy, has a 2.6% stake worth $67m. The largest venture capital investors in the company, including Crosslink Capital, Walden Venture Capital and Greylock Partners, did not sell any shares.
