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RAIN 6/14: RAIN reviews Pandora's road to its upcoming IPO
·Jun 14, 07:44 AM
Posted by: Michael Schmitt

HANSON: EXCEPT FOR COSTS OF GOING PUBLIC, PANDORA PROFITABLE FOR PAST 1-1/2 YEARS

Pandora is expected to launch its public offering tomorrow, Wednesday June 15. As we’ve reported, the webcaster has proposed selling 6 million shares at around $10-12 each (which would give the company a valuation of around $1.6 to $1.9 billion).

RAIN’s Kurt Hanson, in a new blog post here), points out that “except for costs associated with the process of going public, Pandora is profitable — and has been for the past year and a half! …On what I would personally consider a true operating basis, they’re now consistently profitable.”

Hanson also illustrates how Pandora could eventually become a $70 stock, using financial data from their S-1 filing.

Hanson recently calculated that, at a $10-12 stock price, Pandora would rank as the fifth-largest radio operator in the U.S. based on “enterprise value,” (more here). It also currently ranks fifth or sixth overall in terms of audience size (more here).

We first heard rumors of Pandora going public in March 2010 when The New York Times featured the service on the front-page (RAIN coverage here).

Then in January 2011 various news outlets reported that Pandora was planning a $100 million IPO (RAIN coverage here).

That turned out to be right on the money, as in early February Pandora filed for a $100 million IPO (more here).

RAIN then dove into Pandora’s SEC documents and found that the service may have turned down an acquisition offer, that it may expand to sports, talk and news programming and that Pandora has stronger than expected subscription revenue (more coverage here).

Then in early June, Pandora offered its initial proposal: 5 million shares at $7-9 each for a total valuation of around $1.3 billion (RAIN coverage here). Those numbers have since increased.

Stay tuned to RAIN tomorrow for on-going coverage of the Pandora IPO.

WSJ: INVESTORS SHOULDTUNE OUTPANDORA IPO

Today in an online version of its popular ‘Heard on the Street’ column, the Wall Street Journal warns investors that they “shouldn’t chase [Pandora’s] shares if its stock-market debut is as strong as expected on Wednesday.” The piece points both to Pandora’s high royalty costs and the fact that only about 1% of listener hours are devoted to ads (as compared to 20% on AM/FM).

The WSJ also worries about Pandora’s competitors, primarily Spotify but also the new music services from tech juggernauts Apple, Amazon and Google. “Pandora’s challenges shouldn’t be ignored,” the article concludes (here). “This IPO looks like one to tune out.”

RAIN ANALYSIS: This article is wrong — or unclear — on so many points that I can barely count them. But let’s try:

1) The WSJ piece begins, “Investors shouldn’t chase the shares if its stock-market debut is as strong as expected on Wednesday.” But how strong is “as expected”? It doesn’t say! Perhaps Pandora will pop like LinkedIn did — meaning that Pandora’s underwriters underpriced it and thus screwed the company (see a great Henry Blodget piece explaining the concept here). In such an event, Pandora might debut on its first day of trading at a 90% premium over what the institutional investors paid the night before, or, say, about a $20 price. Maybe that’s pricey. But what if it opens at $12? It doesn’t say.

2) The WSJ discusses Pandora’s losses “widening” due to its royalties. Actually, as described in the blog piece here, except for the costs associated with doing an IPO this week, Pandora’s losses have narrowed. Furthermore, there seems to be seasonality to Pandora’s sales numbers, with their Q1 being their worst quarter, which the writer ignores. If they had been able to get the same CPMs as any of the previous three quarters, Q1 would have been reasonably profitable even with the IPO expenses.

3) “Only about 1% of listener hours are devoted to ads, compared to traditional radio’s roughly 20%.” That’s presented as a negative? Actually, it’s a huge upside, as it suggests that Pandora has a lot of headroom in terms of being able to add ad units per hour.

4) References to upcoming competition from Spotify, Apple, Amazon, and Google? Those operate in a different product category entirely — music purchasing, as opposed to radio listening. Virtually irrelevant.

5) “Meaningful profits could be years off”? See my analysis here — to me, it looks more likely in 2011.

6) His “further practical warning” about LinkedIn and Yandex? Actually, those two stocks today are up 60% and 30%, respectively, over their institutional IPO pricing. If you could have bought them near that institutional price, you could have made good money.

7) The quote from Pandora’s CFO Steve Cakebread about “as our listener hours slow down”? I almost guarantee you that’s a misquote. Let’s check later this week, after Pandora’s “quiet period” is over.

8) Finally, “This IPO looks like one to tune out”? Typically business journalism cliche’. Get it? It’s a pun! “Looks like Borders is one page investors may not want to turn.” “Looks like that Apple may have a worm inside of it.” “Looks like Pizza Hut might be a stock with a very thin crust.” — KH

VAN BUSKIRK HIGHLIGHTS WAYS FM RADIO BORROWING FROM WEB COMPETITORS

Evolver.fm’s Eliot Van Buskirk in a new article examines ways in which “those stodgy old vanilla radio stations” are borrowing “interactive features from its online competition.” He points to Supernova Interactive — a system like “Pandora’s interactive approach writ large for mass media” powering some Canadian radio stations — as well as crowdsourcer Jelli. You can find his article here.

SOUNDEX TO OFFER TIPS, ANSWER QUESTIONS FOR WEBCASTERS WITH FREE WEBINAR

SoundExchange, the industry organization that collects and distributes royalties for digital performance of copyright sound recordings, will host a free webinar next Tuesday for service providers (like webcasters).

SoundExchange says the “Q2Y11 Webinar for Service Providers” will cover recent developments in Internet radio and offer tips for using SoundExchange’s website as a resource. They will also answer questions webinar guests can submit in advance. The webinar, co-sponsored by Triton Media, will feature special guest Triton Media COO Mike Agovino.

Click here to register for the Q2Y11 Webinar, Tuesday June 21st at 1pm Central (2pm ET, 11am PT).



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