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IPO Fever Calms Down for Pandora

Sobriety has returned to the market for new Internet companies — at least for one day.

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Shares of Pandora Media, a popular but unprofitable online music service, made their New York Stock Exchange debut on Wednesday,ending the day up 8.9 percent, at $17.42, after rising as high as $26.

It was a solid performance — all the more so because it came on a day of a broad slump in the overall stock market. Yet the Pandora initial public offering paled in comparison to recent incandescent Internet I.P.O.’s.

Last month, shares of LinkedIn , the social network for professionals, more than doubled on their first day of trading. And just a few days later, Yandex — often described as the Google of Russia — climbed 55 percent on its market debut. Both stocks have since pulled back, but remain well above their offer prices.

In Pandora’s case, “underwriters were better able to match investor demand with the I.P.O. pricing, but probably more likely it demonstrated that some of the euphoria that drove LinkedIn to $100-plus has subsided,” said Paul Bard, vice president for research at Renaissance Capital, an I.P.O. advisory firm. “It shows that there is at least some price discipline in the marketplace and that is a good thing.”

(Morgan Stanley and JPMorgan Chase were among the underwriters for both Pandora and LinkedIn.)

Still, Pandora’s ability to go public at $16 a share — roughly double its initial target range of $7 to $9 — reflects a robust demand for Internet stocks, particularly those with a large base of users. Pandora is not yet profitable, like many of its peers, but the company has more than 90 million subscribers and is adding a new user about every second.

Demand for Pandora’s initial public offering was also amplified because of limited supply. There is not a flood of Internet companies rushing to market as there was more than a decade ago during the dot-com boom. And those that are going public, are showing restraint. Both Pandora and LinkedIn offered less than 10 percent of their total shares.

The investor exuberance for new Internet companies troubles some analysts, who say that the multibillion-dollar valuations do not match the fundamentals of the businesses. That concern could swell in the coming months, as some of the most talked about private Internet companies — Facebook, Groupon and Zynga — take steps toward making market debuts. All three are expected to go public within the next 12 months.

Groupon, which was valued at roughly $1.4 billion last year, may seek a valuation of $30 billion with its I.P.O., according to two people close to the company who were not authorized to speak. The social shopping site posted a loss of $456 million last year on revenue of $713 million.

Pandora, which has never posted an annual profit, recorded a loss of $1.8 million in 2010.

“Pandora is a company where the advertising business is still at a very early stage,” said Richard Greenfield, an analyst at BTIG Research. “This is a two-plus billion dollar valuation, for a company that isn’t making any money yet.”

For Pandora, popularity is something of a double-edged sword. It pays significant royalties to record labels to stream songs, and as users spend more time on the service, the fees mount.

“As the volume of music we stream to listeners increases, our content acquisition expense will also increase, regardless of whether we are able to generate more revenue,” the company warned in its latest securities filing.

According to analysts, Pandora will continue to struggle with profitability until it significantly increases the number of ads it serves and improves the way those ads are focused. Success in that area, however, could alienate some of its users, who use Pandora because of its lack of ads.

And there are competitors. Several technology giants, including Google, Amazon.com and Apple, have recently expanded their digital music services. Upstarts like Spotify, a streaming music service that is popular in Europe, also threaten Pandora’s market share.

Despite the hurdles ahead, Pandora said it still has an enormous opportunity to grow market share. Joseph Kennedy, the company’s chief executive, said that Pandora had room to expand because it has only about 3 percent of the domestic, radio-listening market.

“We’re really focused on just improving the experience we provide to our listeners everyday and giving them that opportunity to listen to Pandora everywhere they’re demanding to listen to it, in the car, in the home, those are the great near-term opportunities,” he said.

The company sold 14.7 million shares on Tuesday evening, raising $234.9 million. Its lead underwriters, Morgan Stanley, JPMorgan Chase and Citigroup, also have the option to sell an additional 2.2 million shares. At Wednesday’s closing stock price, the company is valued at about $2.78 billion.

Mr. Kennedy wanted to look beyond the I.P.O. in an interview on Wednesday. “Many years from now, we’ll look back on this as just one step in the process of building a lasting great company,” he said. “We don’t pay attention to the market, we’re focused on the opportunity.”

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