The Pandora (P) IPO started trading at $20/share, higher than the originally projected figure of $16/share. We saw an immediate 63% jump in the share price to $26 a share. This puts Pandora’s value at $4.2 billion. By all accounts, Pandora had a successful IPO and the hype around the opportunity to buy Pandora shares remains. However, a harder look begs the question, is it worth it?
Pandora offers its users an interactive radio experience either for free while serving up ads or without ads at $36/year. Nevertheless, there is growing competition in this space from providers like Google (GOOG) and Amazon.com (AMZN). Both have recently launched cloud music services. Of course, Apple (AAPL) is not to be out done and has recently announced plans to create iCloud access to iTunes.
As user numbers grow in the online music space, data usage will increase. These services all rely on data streaming to the end user devices. With the age of data caps and fees for data overages upon us, Pandora’s model may not prove the most resilient.
With growing competition from Google, Amazon and Apple, as well as projected losses through 2012, one should take pause. Pandora has yet to turn a profit and has shown a loss of $6.8 million on revenue of $51 million in Q1 of 2011. Not to mention the growing demand for bandwidth which will lead to a crackdown on data usage in the not to distant future.
Why then are so many investors lining up to purchase shares of the Pandora IPO? I think Tony Wible, analyst at Janney Capital Markets put it best: "There is scarcity value in social media IPOs, which is why many are getting fairly lofty valuation multiples," said Wible, "These companies are making money from momentum and not fundamentals, at least initially."