In a sign of market confidence, music streaming company Pandora Media today increased the share price offering on its IPO to $10-$12 from $7 to $9. But not everyone is sold on Pandora’s stock—research firm BTIG issued a report recommending against buying into the company’s offering, citing Pandora’s weak financial outlook. The company should be valued between $4 and $6 per share, the report states. The hike makes Pandora’s mid-point market cap $2.134 billion, which BTIG values at 25x Pandora’s estimated full year EBITDA (profits, essentially) for 2015. Yes, you read that right. The company isn’t profitable and likely won’t be for awhile.
Pandora earns revenue through display and audio ads; the company’s totals for 2011 are projected to be $137 million. It’s not expected to net a profit for the next two years—and as its listeners increase, the site must pay higher royalty fees to music labels. BTIG’s report argues that Pandora’s mobile app hurts its bottom line because it charges less for mobile advertising than for PC ads.
Mobile listening hours, which make up 60% of Pandora’s streaming, cannibalize higher-cost desktop hours. BTIG is bearish on Pandora’s business model because users don’t engage with ads, and Pandora’s 34 million users pale in comparison to the 242 million Americans who listen to regular radio. Lastly, the company can’t compete with regular radio for ad dollars because it doesn’t have a local sales team.
Pandora plays in a highly competitive industry segment, as well. Aside from regular radio, Pandora competes with music subscription services like Spotify and iTunes, cloud-based services from Amazon, Google and Apple, and digital startups like Slacker, Songza, and Turntable.fm.
Pandora is not currently covered by any other equity analysts. Based in Oakland, Calif., the company has raised $65 million in venture backing from Crosslink Capital, Greylock Partners, Labrador Ventures, Walden Venture Capital, GGV Capital, and Hearst since it got its start in 2000. Hearst is the only investor unloading shares in the late stage company’s IPO, slated to take place June 15.
The share increase comes on the heels LinkedIn's IPO, which traded up 140% on its first day and earned its underwriters criticism for undervaluing the company and "leaving money on the table." Pandora and LinkedIn lead a slew of VC-backed Internet company IPOs this year. Groupon last week filed to take itself public; Facebook, Zynga and Yelp are expected to list in 2011 as well.