Pandora Media Inc (P.N) shares plunged as much as 25 percent on Thursday, sending it below its IPO price and burning investors who had once clamored for a piece of what was touted as a red-hot sale.
During its second day of trade, doubts mounted about whether the online radio company would ever turn a profit and compete with its Internet rivals, causing investors to bail out of the stock from the earliest hours of the session.
Shares closed at $13.26, down $4.16 or 24 percent, on the New York Stock Exchange. This is below the $16 per share IPO price, meaning investors who bought the stock as it went public have lost money.
Analysts advised investors to avoid buying the stock because shares are too pricey and do not reflect how the company will do competing against its rivals.
BTIG analyst Richard Greenfield put a sell rating on the stock and a $5.50 price target on it.
"Its business model does not scale in the same way as other successful Internet businesses," Greenfield said.
The research note also raised questions about the company being able to sustain itself on advertising and how its content costs for its music are eating into its profit.
The bigger Pandora's audience gets, the more it must pay record labels in licensing fees, hurting the mostly free radio service's chances of becoming profitable.
Other analysts on Thursday said Pandora would have problems thriving in the competitive landscape for online music.
"In our estimation, Pandora is just not an attractive way to play. What's their competitive advantage? They don't have one," said Morningstar analyst Rick Summer, adding that he expects shares to tumble to $6.00.
Pandora is facing off against traditional radio companies, satellite radio provider Sirius XM Radio Inc (SIRI.O), music services such as Rhapsody and offerings from Apple Inc (AAPL.O), Google Inc (GOOG.O) and Amazon.com Inc (AMZN.O).
Another major concern about Pandora is 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.
On Wednesday in its stock market debut, Pandora shares surged 48 percent in early trade but then reversed course and closed at $17.42, not far above their IPO price. The company said it raised $235 million from its IPO.
Pandora, which has been around for over a decade, runs a service that allows listeners to create music playlists. It has about 90 million registered users.
(Reporting by Liana B. Baker, editing by Gerald E. McCormick, Gary Hill)