A Sirius Look at the Pandora IPO

Includes: P, SIRI
by: Jefferson Starship

The Pandora (NYSE:P) IPO has given investors a number of takeaways to learn from. There isn’t much that hasn’t already been said about Pandora or its apparent competitor, Sirius XM Radio (NASDAQ:SIRI), so I will attempt to keep this concise. Sirius, despite its recent fall, is still the breadwinner in this industry, and Pandora will always be a distant second, but I am not fully counting P out as a stock.

Let’s start by first establishing that Pandora and Sirius are not competitors, at least not yet. Sirius radio is used in automobiles. The company will tell you that it has remote receivers and all that, but no one buys them. Pandora is Internet radio, clearly meaning that people listen to it when they are on the Internet.

I recognize that people can be simultaneously on the Internet and in a car. I have the Pandora app on my iPhone (NASDAQ:AAPL), but my car is not equipped with an auxiliary port. It does, however, have a USB iPod dock, but an app won’t play through it. Additionally, smart phones that would be capable of carrying such an app have no more than one-third of the cell phone market as a whole. As a result, there could be room to grow there, but that’s not what this is about.

Music-wise, I would much rather listen to my personal collection than either Sirius or Pandora. The music on Sirius is meant for middle-aged drivers with poor tastes in music and their 14-year-olds who bounce around to the Top 40. You may be asking: How can a Sirius investor and subscriber knock its product like that? I subscribe to Sirius so that I can listen to talk radio like CNN and Bloomberg, and coverage of every NHL game. That right there is enough to warrant the monthly charge (though I’m actually still on my free trial).

Pandora’s music selection is not much better. I must confess that I am currently listening while I type this, but only because my iTunes catalogue is on a different laptop. I have about 10 Pandora “stations” and each rotates through roughly 30 songs. For comparisons purposes, I have about 4,000 songs on iTunes and I don’t have to weed through songs I don’t like.

Pandora professes itself as the Music Genome Project, alluding to the notion that it has some never-ending database of music. But one would be quick to notice that only big-name record labels get airplay. Any actual music fans are not going to discover new music by listening to Pandora. And this could be completely wrong, but I’m guessing that these labels offer some sort of incentive to Pandora for having their music played more often than others.

So, as you know, Pandora makes its profits, or lack thereof, through advertisements. I suffer through one every four or five songs. This would never happen on my iTunes, and doesn’t happen on Sirius either. These advertisers will only pay a limited amount to Pandora, because let’s be honest: Who actually clicks on these ads?

This brings us to why Pandora had to go public. Let’s look at this in as basic a form as possible. One takes one's company public to raise capital. The reasoning behind that can be complex. Think of it like states and bond issuances. If a state says, “We need money right now, let’s issue bonds so that citizens and banks can earn marginal returns but at almost zero risk,” this is like an IPO. If a state has a surplus and says, “We have way too much cash on our hands, let’s call in some bonds,” this is like a share buyback.

From Pandora’s standpoint, it may have been thinking that a public offering would raise current cash funds so that it could invest in profit-growing ventures, like figuring out how to get people to actually upgrade to Pandora One. This possibility is of course ever-present. Who knows, it may be researching some vehicular device that would catapult it into competitor status with Sirius. But for skeptics, it would appear that this offering was to raise capital and offset some losses; deal with the lack of profits first then figure out a way to innovate the product into something people would pay for.

For example, if you had a very prosperous, self-sustaining business, say the Dallas Cowboys, you would never consider going public; you would just sit on it and rake in the cash. Of course, that is not the case for Pandora. Its lack of profits was well-known and always an arrow in the quiver of the Siri-supporters/Pandora-haters. For those who did buy the stock, there is still hope. P must have something up its sleeve as an idea as to what to do with this cash.

With that in mind, it is no surprise that the stock plummeted after climbing up to around $24. It’s in the $12s right now and could continue dancing for quite some time, since it is hard to value a stock with no earnings. It will certainly be subject to swings as a result of analysts setting seemingly meaningless price targets, especially so soon after the offering. If you are truly interested in buying, I would watch very carefully for these swings and wait patiently for a while for information to compile so you can make an informed decision rather than a shot in the wind.

Disclosure: I am long SIRI, AAPL.