Pandora Faces a Tough Road After IPO


The stock market heard the sounds of Pandora’s (NYSE:P) music on Wednesday after its IPO.

The music streaming website’s debut on the stock market opened at $20 (a 25% increase from its IPO pricing of $16 late Tuesday), valuing the company at $3.2 billion. That price also reflects a jump of 185% from the original Pandora IPO price of $7 announced back in February.

Should you also tune into shares after the Pandora IPO?

According to its SEC filing, Pandora earned $90.1 million in revenue last year, an increase of $30.1 million from the same period the year before.

The site, which almost shut down earlier due to delays in royalty legislation, primarily earns money through advertising and subscription. According to its S-1 filing, the company earned 86% and 14% of its revenue through advertising and subscription, respectively, through Oct. 31, 2010. The figures represent an increase of 5% for subscription-based services from Jan. 31, 2010.

This might be good news for any other site; however, for Pandora, it’s a mixed blessing. Repeat listeners are expensive for the site’s infrastructure because they do not add significant new information for advertisers. Or, as Pandora founder Tim Westergren explained earlier, repeat users who listen to music cost more to Pandora.

But while new subscribers bring fresh advertising revenue, they also hike costs in the form of royalties.

As a share of the total revenue, Pandora’s advertising has decreased this year. This could be because advertisers have multiple avenues for their products as the number of music streaming sites on the internet multiplies. Europe-based and Spotify, a social music-streaming site that was launched after Pandora, already provide stiff competition to Pandora for advertising dollars.

Add the growth of cloud services such as Apple’s (NASDAQ:AAPL) iCloud music service and the competition just got more intense.

Instead, the company is looking to other avenues for growth. According to the company’s S-1 filing, “the number of listening hours on mobile devices surpassed listener hours on traditional computers.” But, the filing also states that Pandora hasn’t been able to generate revenue from mobile users as effectively as it has for traditional listeners.

If Pandora can figure out a way to cut royalty costs and diversify its distribution channels,  there is no reason why it’s stock is not sweet music for the markets.

As of this writing, Rakesh Sharma did not own stocks in the companies listed above.

Article printed from InvestorPlace Media,

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