|Pandora’s Valuation Overlooks Competition Concerns|
JUNE 15, 2011, 6:58 PM ET
By Matt Jarzemsky
Pandora Media Inc. shares fell from their early highs Wednesday during a rough day for the broader market, but the Internet radio company’s valuation remains quite healthy in comparison to its peers and ahead of rising competition.
Pandora’s current stock price, when measured against its reported revenue, suggests the Oakland, Calif., company is about 18 times more valuable than CBS Corp. and nearly nine times more valuable than Amazon.com Inc.–two well-established and profitable companies that, among their different operations, run businesses considered competition to Pandora.
Nonetheless, investors Wednesday piled into Pandora as the stock–expected to price between $7 and $9 as recently as last week–closed Wednesday up about 9% at $17.42. Investors, competing for a limited amount of available stock, are attracted by the site’s rapidly rising number of users and listening hours.
“We understand the importance of operating margins and cash flows, and our published financials demonstrate clear improvement,” Chief Executive Joseph Kennedy said. “We think investors also understand that it is important for use to invest in our growth in order to take full advantage of our opportunities.
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 closing price gives a market value of $2.82 billion, 20 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 1.22 times sales, Amazon is at 2.3 and satellite radio operator Sirius XM Radio Inc. is at 2.7 times. In addition, FactSet says Apple Inc. trades at 3.5 times sales, and Google Inc. is at 5.2.
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 those last 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.