Pandora's IPO and the Great Sucking Noise

| About: Pandora Media (P)

What was that great sucking noise that could be heard last Wednesday? Some may say it was the sound of retail investors' money being sucked down the drain, which is difficult to counter given Pandora's (NYSE:P) price action last week following the initial surge that took the company to a market cap of $4.2 billion at one point Wednesday morning. It appeared that the "smart money" may have cashed out early on this one, as the stock fell significantly below its IPO price on Thursday. Its kind of surprising that the deals' bankers haven't done more to prop it up, particularly when you consider how many more deals they will be trying to place over the next six months. Too many high profile broken IPOs leads to reduced retail investor demand leads to smaller IPO placement valuations leads to smaller fees for the bankers.

Alternatively, the great sucking noise could just as easily been the sound of all the oxygen leaving the room from the great gasp as Daniel Ek (CEO of Spotify) first saw the $4.2B intraday valuation of Pandora on Wednesday morning. Anyone care to bet who called their ibanker first on Wednesday? Was it Ek asking how long it would take to get their IPO machine rolling or Pandora CEO Joe Kennedy calling his to see how long they must wait before they can start acquisitions using their newly minted currency?

The initial surge in Pandora's stock should not come as a huge surprise to market watchers given the widespread consumer appeal of the Pandora music service. Many (including us) expected Pandora's stock price to enjoy a first day "pop" due to its extraordinary appeal to retail investors. Further evidence of our "retail investor demand for exposure to the mobile/streaming music revolution" thesis was seen in the interesting trading action with the other mobile/streaming music pure play. Tiny Atrinsic (NASDAQ:ATRN) (owner of the Kazaa music service) saw its market cap shoot up about 30% (to nearly $25 million) after Pandora's big opening and its entire 1.1 million share public float turned almost twice, but like Pandora gave it all back and then some over the next couple of trading sessions. Other than being a good target for acquisition by Pandora, there is very little to tie these two together as their business models are quite different, as Kazaa is an "on demand" mobile/streaming service more like Rhapsody and Spotify rather versus Pandora's radio format.

As I wrote earlier last week, retail demand for exposure to the mobile/streaming music revolution could cause Pandora to get an outsized valuation coming out of the chute, but its ability to retain a $2b valuation will likely be driven by its execution in two key areas: 1) acquiring subscribers to beef up the recurring revenue side of the business; and 2) evolving the advertising rates to reflect the potential of its targeted advertising platform. Unfortunately for current Pandora investors, it may be some time before they will have any idea of whether the company is executing in either regard (absent announced acquisitions) and this makes it difficult to foresee a material catalyst that could take the shares significantly above last week's offering price over the near term.

Disclosure: I am long ATRN.