Internet radio giant Pandora (P) notified the street this week that it will be conducting an offering of about 10,000,000 shares in hopes of raising some $250 million to finance operations. The company is the leader in the Internet radio category, but has been challenged to get to profitability. The company disclosed that it will use the money for general corporate purposes, and perhaps even acquisitions.
This offering will dilute the stock, but should give the company needed funds to work toward a profitable status. Pandora's stock trades at an impressive $24 dollars per share, which translates into a market cap of well over $4 billion. In the last year shares traded as low as $7.08 and current prices represent 52 week highs.
Despite a lack of profits and fundamental valuation, Pandora has enjoyed a hefty premium valuation on potential, and not without good reason. As more and more smartphones enter the market, the potential for Pandora use is increasing. This will compound as car dashboards become more and more connected as well. However, there is stiff competition from the likes of Sirius XM (SIRI), Apple (AAPL), Spotify, Slacker, and others.
At the end of the last quarter Pandora's cash and cash equivalents were roughly $69 million, down 22% from the $89 million that the company started the year with. This would imply a cash burn rate of $3.3 million per month. In essence the company was getting to a point where its cash cushion could create worries. Despite the dilution the equity is still reaching for new 52 week highs.
Current year estimates have revenue of about $650 million with the following year at nearly $900 million. If Pandora can swing these numbers there is some justification in the current stock price, but the risk side of the equation would call for some caution with the stock at all time highs.
Pandora does enjoy great traction from consumers, but monetizing that traction has been the challenge. Competitors such as Sirius XM are locking up exclusive deals that make expanding the content line-up outside of music challenging. Sirius XM's most recent announcement was that it is the exclusive audio home of Fox News. Thus, while mobile listening is indeed on the rise, the content that will attract consumers may be getting more elusive.
In summary, I see some real potential in Pandora but am very cautious as to the current valuation. As part of this most recent offering Crosslink Capital, the largest shareholder of Pandora, will sell 4 million shares. This will take its stake from 16.5% to just over 13%. I find it interesting when an equity rises as its largest stakeholder decreases its position. In many ways I see a correction in this equity happening sooner rather than later, and more near term volatility as the market digests this news. Yes, it is good that Pandora can solve a potential cash crunch, but the business model needs to show that it can be profitable and offer growth if we want to see these high valuations continue. Stay Tuned.
Additional disclosure: I have no position in Pandora or Apple