Internet Radio Leader Pandora Media's IPO Rocks on Its Debut

| About: Pandora Media (P)
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Pandora Media's (NYSE:P) stock opened up 25% at $20, after they priced their 14.7 million share IPO above the revised range at $19.00. The original range was $7-9, and last week the company revised the range to $10-12. Of the shares offered, the company is selling 6M shares and selling stockholders are offering $8.7M shares. Proceeds are expected to be used to pay accrued and unpaid dividends on their redeemable convertible preferred stock, and the remaining proceeds for working capital and general corporate purposes.The Hearst Corporation is selling approximately 4.37M shares on the deal, while other major venture capital shareholders Crosslink Capital, Walden Venture Capital Greylock Partners, Labrador Ventures and affiliates of GGV Capital are not selling on the offering. Crosslink will own 21.9%, Walden 17.82%, Greylock 13.4%, Labrador 8.1%, GGV 4.9%, and Hearst Corp. 2.73% post IPO. At the $16 price, the company will have a market capitalization of approximately $2.56B. The lead underwriters on the offering are Morgan Stanley, JPMorgan and Citi.
Pandora is the leader in Internet radio, with over 34 million active users. Pandora combines the best of broadcast radio with the technical capabilities of the Internet. Their technology allows for personalized radio for their listeners. Through a combination of the Music Genome Project (which captures the most complete comprehensive analysis of each song), individual real time feedback processing, and collective feedback processing, Pandora is able to suggest songs and create personalized playlists. The Music Genome project consists of a database of 800k+ songs, 80k+ artists, 240+ genres, and 450 attributes where they capture melody, harmony, form and rhythm.
For FY 2011 Pandora had 3.8B listener hours and 58% market share of Internet radio listening. Yet this still only represents 3% of the total radio listening hours, with terrestrial radio representing 95%. Pandora’s listening hours have grown to 3.8B in FY 2011 from 0.9B in FY 2009. The company states that mobile is driving the listening hours, with 60% of listening from mobile devices. They also believe there is plenty of room to grow as their average monthly listening hours per visitor is approximately 16 versus broadcast radio with an average of 56 hours.
Pandora monetizes their service through advertising (which represented 87% of their FY 2011 revenue) and their Pandora One subscription service (which accounted for 13%). Revenue has grown from $19.3M in FY 2009 (FY ends Jan 31) to $137.8M in FY 2011. For 3 months ended April 30, 2011, revenue was $51M up from $21.6M in the same period 2010. The company has thus far recorded operating and net losses since inception, and states they expect to continue to have an operating loss for the FY end 2012. They have however, decreased this operating loss from $27M in FY 2009 to $321k in FY 2011. The company has a long term target of approximately 20% operating margins. As with their room to grow listening hours, the company believes there is plenty of room to grow in ad revenue as their audio ad load (minutes/hr) was less than 1, as compared to that of broadcast radio with 13.
When the company began the Internet radio category was dominated by Yahoo (YHOO), AOL and MSN. All three of which have effectively exited this market. Current competition includes major broadcasting companies that stream webcasts such as CBS (12% share) and Clear Channel (9% share), and online providers such as iheartradio,, Slacker Personal Radio, RDIO and Rhapsody. The company also cites Sirius XM (NASDAQ:SIRI) as a competitor in the S1.
Pandora is the next 2011 Internet company that has sparked investor interest. The $16 IPO price is double that of the initial price range, and clearly represents high demand. The company is a clear leader in the category, having displayed exponential growth that looks to continue into the next couple years. The question is whether the only winning investors will be the ones lucky enough to have been allocated shares on the IPO. Those investors playing in the aftermarket may want to take another look at the valuation, as this company is clearly benefiting from brand recognition and hype, but still has a couple years to go before showing profits.

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