Pandora Valuation A Boon To Shareholders, Despite Concerns

Investors in Internet radio company Pandora Media Inc. (P) are singing a happy tune Wednesday as shares jumped as much as 63% on the stock's first day of trading, even as history and competition raise concerns about the sustainability of the company's current valuation.

Pandora's current stock price suggests the Oakland, Calif., company is about 20 times more valuable than CBS Corp. (CBS) and almost 10 times more valuable than Amazon.com Inc. (AMZN)--two well-established and profitable companies that, among their different operations, run businesses considered competition to Pandora.

Nonetheless, investors Wednesday have piled into Pandora as the stock--expected to price between $7 and $9 as recently as last week--now trades above $20. Investors, competing for a limited amount of available stock, are attracted by the site's rapidly rising number of users and listening hours.

"We've been improving operating margin, improving cash flow," Chief Executive Joseph Kennedy said in an interview with CNBC. "Our progress to date on both fronts is really why we're here--providing a great experience, but we really understand the business side as well."

Pandora allows listeners to create up to 100 of their own personalized "stations" of music using playlists based on listener feedback and an algorithm that slots in other songs that users are likely to enjoy. The free service--Pandora makes its revenue primarily through advertising--is available through computers, mobile devices and automobiles.

Kennedy said the company hasn't given guidance on when it might be profitable. According to analysts, Pandora remains a few years from profitability. The company faces higher royalty payments to music labels and publishers as usage increases, and Pandora has yet to offset such expenses with advertising revenues and user fees.

"Put simply, the revenue and earnings leverage from growing usage is simply not enough to scale earnings relative to the IPO's proposed valuation," BTIG analyst Rich Greenfield said in a note last week.

Greenfield warned of the risk of estimating future growth based on recent performance as "it is hard enough to forecast the competitive dynamics of the digital and mobile music landscape over the next 25 to 36 months, let alone four to six years out."

Pandora, priced Tuesday night at $16, opened 25% higher Wednesday and traded as high as $26. The stock recently moved at $20.53, 28% higher than the offer price. The current price gives Pandora a market value of $3.32 billion, 24 times its annual sales of $137.8 million for the fiscal year ended in January. The company's market cap includes the sale of 2.2 million additional shares that the deal's underwriters have the option to offer.

In comparison, according to Factset Research, CBS trades at 1.2 times sales, Amazon is at 2.5 and satellite radio operator Sirius XM Radio Inc. (SIRI) is at 2.7 times. In addition, FactSet says Apple Inc. (AAPL) trades at 4.7 times sales, and Google Inc. (GOOG) is 5.8.

The turnover in Pandora's shares has been brisk Wednesday. Volume surged in morning trading, with 25.5 million trades almost two hours after the market opened. That volume handily surpasses the 14.7 million shares sold by Pandora and some of its major shareholders in the IPO.

Overall, Pandora made at least $96 million from the sale of its 6 million shares at the IPO price of $16, not including the over-allotment shares. Pandora said it plans to use the proceeds to pay dividends on convertible preferred stock and to support general corporate purposes.

Pandora's strong first-day gains recall the last blockbuster Internet debut on Wall Street, LinkedIn Corp. (LNKD) last month. The popularity of that offering also was helped by a limited float. Since then, though, LinkedIn's shares have lost about 39%.

Pandora faces competition from traditional radio; online services such as Spotify and Grooveshark; and music lockers from Apple, Amazon and Google. Pandora admitted in its filing that the three companies and Facebook pose a significant threat if they were to develop a competing Internet radio platform, because they likely would have advantages in resources, technology and services.

Nonetheless, Pandora continues to grow. For the three months ended April 30, the company's revenue more than doubled from a year earlier to $51 million, and its numbers of users went to 94 million from 82 million at the end of January.

But its loss for the same period widened to $9.1 million from $5 million a year ago. Since its inception in 2000, Pandora has lost a total of $92.1 million through April 30.

--Matt Jarzemsky, Dow Jones Newswires; 212-416-2240; matthew.jarzemsky@dowjones.com

CBS (NYSE:CBS)
Historical Stock Chart
From Jun 2024 to Jul 2024