Pandora’s IPO: Thumbs Up or Thumbs Down?

Internet radio company debuts on New York Stock Exchange

Pandora’s box is open for business, but will Wall Street like what it finds inside?

That’s the question of the day for industry watchers, as Pandora Media, the popular Internet radio company, makes its debut on the New York Stock Exchange.

The Oakland, Calif.-based music streaming service, which will trade under the symbol “P,” is the latest company to go public in what many consider to be the start of a tech IPO boom. In May, LinkedIn’s public offering was marked by an explosive pop, and Facebook, Zynga, and Groupon are expected to IPO in the coming year.

Last week, Pandora announced plans to up its IPO offering from 13.7 million shares at $7 to $9 a share to 14.7 million shares at a price range of $10 to $12. If all goes according to plan, the IPO could raise upwards of $162 million—or more. Last night the company raised the offering price again, and it's now expected to open this morning at $16 per share.

While analysts caution that investors can be a fickle bunch, they say that Pandora’s pre-IPO bump bodes well for the company’s first day of public trading.

“It’s hard to get granular with this type of thing, but when a company raises the range and increases the shares, that’s a pretty good signal that…we’re going to see shares in the positive territory [today],” said Matt Therian, an analyst with Renaissance Capital, an IPO advisory firm in Greenwich, Conn.

With a reported 90 million registered users and 34 million active users (who use the service at least once a month), Pandora, which makes the majority of its revenue from advertising, is well-positioned to expand in a potentially $24 billion ad market, Renaissance said.

Although it started streaming music on desktops and laptops, Therian said it’s successfully followed consumers onto iPhones, BlackBerrys, and other mobile devices, capturing valuable user data such as zip codes and ages along the way.

As Pandora expands its offerings in cars and amps up competition with terrestrial radio, its big opportunity could be in attracting businesses with highly targeted local ads, he said.

But not all analysts are convinced that this is a likely scenario for the company.

Citing fixed costs that have kept profitability out of reach, as well as advertising challenges, global research firm BTIG cautioned investors against participating in Pandora’s IPO.

“Pandora’s fundamental problem is that active users and listening hours are growing rapidly, but those listener hours have fixed (and annually escalating) royalty costs (fees to music labels),” Richard Greenfield and Brandon Ross said in a report issued last week.

The analysts also said that while the number of mobile Pandora users is growing, the company's ad rates for mobile are significantly lower than for PCs.

But the biggest ad-related question for Pandora has to do with how it plans to grab a share of the $13 billion terrestrial radio ad market, BTIG said.

Less lucrative though they may be, display ads still work on mobile devices. But as Pandora migrates to the automobile, it will have to find ways to compete against local broadcasters with effective audio-based ads.

Still, others point out that CEO Tim Westergren and his team have proven that they know how to attract and monetize an impressive user base.

Tim Bajarin, a Silicon Valley analyst and president of Creative Strategies, said that while Pandora has significant back-end costs, it is led by smart people with a sound strategy and a large audience to leverage.

"From this point on, it's just the investors' judgment—what they see as being a viable company and one with potential," he said. But "everything I think is necessary is in place to have what I think would be a solid IPO."