A Review of Pandora's IPO

| About: Pandora Media (P)

Based in Oakland, California, Pandora (NYSE:P) is scheduling a $162 million IPO with a market capitalization of $1.76 billion at the price range mid-point of $11 for Wednesday June 15, 2011. The new price range mid-point is up 38% from the previous price range mid-point of $8.

P is selling 9% in the IPO before the green shoe option. Linkedin (NYSE:LNKD) sold 8% so Pandora is in the same range of limited float.

FINANCIAL SUMMARY -- Pandora’s sales were up 137% in the March 2011 quarter versus the March 2010 quarter. Losses increased to $7mm from $3mm. The biggest expense item, content acquisition costs, was respectively 57% and 58%

VALUATION -- At the increased price point mid-range of $11 Pandora is valued at 8.6 times annualized revenue for the March 2011 quarter and 25 times book value.

Pandora Valuatiion Metrics

CONCLUSION -- Pandora is expected to have an IPO pop the first day, most likely driven in part by very enthusiastic listeners. However, Pandora says it has a 50% market share of the Internet radio market.

If Pandora can’t make money with a 50% market share, will they ever make significant money? Also, content acquisition costs seem to be creeping up and that’s a uncontrollable expense for Pandora.

We expect Pandora to trade up in the initial after market and then trade down, much like Linkedin (LNKD) which IPO’ed at $45, started trading at $82, climbed to $122.70 the first day. Linkedin is now down 40% from the high to $72; or Renren (NYSE:RENN) which IPO’d at $14, hit a first day high of $24. Renren is now down 62% from the high to $9.

CLOUD COMPETITION -- Users also have the option of uploading their favorite sound files to Apple’s (NASDAQ:AAPL) iCloud, Google Music (NASDAQ:GOOG) or Amazon’ (NASDAQ:AMZN) music cloud, all of which provide a different and some would say better listening experience because you can choose your sound files.

It may be true that Pandora has 50% of the Internet radio market, but that’s a limited market definition. The broader market includes cloud competition, Sirius Radio (NASDAQ:SIRI), iTunes, mp3 files and so on.

BUSINESS -- Pandora is the leader in internet radio in the United States, offering a personalized experience for each of its listeners. Pandora has more than a 50% share of all internet radio listening time among the top 20 stations and networks in the United States, according to a November 2010 report by Ando Media, an audience measurement and ads management firm.

INTELLECTUAL PROPERTY -- One issued patent and two patent applications pending in the United States

EMPLOYEES -- As of April 30, 2011, P had 359 employee

USE OF PROCEEDS -- Shareholders expect to sell 6 million shares (as of June 10) up from 5 million shares. P intends to sell 8.67 million shares to net $58 million, allocated to pay dividends on preferred stock. 55% of proceeds to P ($32mm) is allocated to pay accrued dividends on preferred stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.