This Wednesday was another interesting day for tech investors as Pandora (P) went public. Not only does it have a “cool” 1 letter ticker but its also a very interesting company that could possibly change the world. It’s not Facebook, but it still offers something that could have quite an impact over the next few years. If you have never heard of the company, Pandora is an “internet radio” that offers a viable alternative to Sirius. (SIRI). The big difference of course is that Pandora is free to use and relies on both advertising and selling “premium memberships” to become profitable.
Yes, I did say that right, it aims to become profitable. Currently, Pandora does have climbing revenues but also rising losses as it continues to look for more revenues. What are its financials like? Pandora’s most recently disclosed earnings were a loss of $6.75 million on revenues of $51 million. Those revenues were up over 100% from the same quarter one year prior but so was the loss.
What is Pandora currently being valued at? After its first day of trading, that number was over $2.7 billion. That is a ratio of 13.6 times… its revenues. Since the company is losing money, a P/E ratio is much more difficult to estimate. As you can see in the chart below, Pandora’s stock has declined a fair bit since then. At this point, I think it’s too early to determine how much Pandora will be able to make per share.
Pandora vs. Facebook
Pandora does not have much revenues or profits but one thing it does have is users. It currently has over 90 million users although only about one third of them connect to the service more than once per month. Very encouraging is the fact that Pandora is basically absent from countries outside the US because of copyright issues. If it were able to reach agreements, that number could rise dramatically. The problem of course remains that those licenses are very complex and costly making it difficult for Pandora to count on these being done quickly.
One major problem is that it’s difficult to imagine Pandora’s revenues and profits rising very quickly. It has important costs for each user and revenue growth has been slowing down. I am far from convinced of how Pandora will be able to increase its profitability. In fact, the company expects to continue losing money for at least the next 18 months. That is not great news for investors. Is it a bubble? Perhaps not. But seeing companies with no specific plan to reach profitability is certainly one sign that things could be getting out of hand.
Do I think Pandora will be a bust? No, not necessarily. It does remain a gamble to some extent to invest in Pandora and I unfortunately feel like its current valuation makes it an expensive gamble. Like most recent tech IPO’s, I do not expect to trade it in the near future but if I did, I would hesitate greatly to be long unless using it as a major gamble. However, I am starting to get worried seeing stocks like LinkedIn (LNKD) and Pandora become public at such high valuations making it unlikely that I will be able to get any type of bargain on Facebook’s anticipated IPO offering.