Like a Lady Gaga song, Pandora’s (NYSE:P) initial public offering had all the signs of a big hit. The company, which is the top Internet radio provider in the U.S., had increased the price range on its IPO to $10-$12 a share from $7-$9 just in the past week.
Pandora then priced its IPO deal late Tuesday at a sizzling $16, and the demand was substantial. So far in Tuesday’s trading, after the Pandora IPO its stock is at $22.55.
It’s exciting stuff, but is Pandora still a good investment after the IPO? Let’s take a look at the pros and cons:
Pros
Unique business. Pandora personalizes music for its listeners — a user can create his or her own radio stations based on artists or genres.
At the core of this is the Music Genome Project. For the past decade, top music experts have been analyzing songs based on 450 attributes. The database has more than 80,000 artists and 800,000 songs.
Growth. There are more than 90 million registered users, with one new member signing up every second. Pandora has more than 50% of the Internet radio listening time.
A big help is that Pandora has been aggressive in making its service widely available. For example, it is one of the top apps for the iPhone, BlackBerry and Android (there have been more than 50 million downloads). There are also partnerships with Panasonic, Samsung, Mercedes-Benz, Ford (NYSE:F), and Sony (NYSE:SNE).
Advertising opportunity. Pandora can target ads based on various factors, like age, gender, zip code and music preferences. The ads can also be served on many platforms, such as the desktop, consumer electronics, mobile devices and cars.
Cons
Recording industry. Over the years, there have been many online music operators that have failed. Often, the reason has been the high royalties and requirements of the recording industry. As a result, it has been mostly large companies, like Apple (Nasdaq:AAPL), that have been able to thrive.
In the case of Pandora, it must pay more royalties as listening volume increases. However, mobile ad rates are still fairly low. Keep in mind that 48% of revenue goes to licensing and royalties.
Losses. Pandora also will need to invest heavily in its infrastructure. As a result, Pandora expects to incur operating losses through at least the end of fiscal 2012.
Valuation. Pandora is trading at a nose-bleed valuation, coming to about $3.5 billion. That’s 25 times last year’s sales. And the company has never posted a profit since its inception.
Verdict
It’s clear that Pandora has an avid user base. In fact, much of the company’s registrations come by word-of-mouth.
Yet the competitive environment is intense. Pandora must contend with large operators like Apple, Amazon.com (Nasdaq:AMZN) and Google (Nasdaq:GOOG). There are also interesting startups like Rdio and Slacker.
Then how should investors play Pandora? Despite all the hoopla, it’s probably a good idea to wait because there is likely to be lots of volatility. Remember that formerly hot IPO LinkedIn (NYSE:LNKD) is off about 19% since its debut.
The cons outweigh the pros on Pandora’s stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
