Business Matters: Skullcandy IPO Shows Market Interest in Premium Headphones
Business Matters: Skullcandy IPO Shows Market Interest in Premium Headphones

Market On Premium Headphones: Outlook Good
-- Last week's IPO by headphone maker Skullcandy indicates investors see potential in the growing market for premium headphones. The company sold 9.4 million shares at $20, which was above the $17-$19 target range. Over half the shares were sold by existing shareholders, so Skullcandy grossed about $78 million before expenses. It will use the IPO proceeds for debt repayment and general corporate purposes.

Skullcandy shares rose 2.54% to $20.19 Monday, giving the company a market value of $527 million.

Skullcandy is known mostly for its involvement with sports, but it also sponsors a number of musicians including Snoop Dogg, Metallica, Ozomotli, the Bouncing Souls and Thrice, according to its S-1 regulatory filing. Although many of its models are less expensive, in-ear headphones, the company is also in the premium headphone market. Jay-Z and RocNation have partnered with Skullcandy to offer aviator-styled, over-the-ear headphones.

The company's income statement reflects well on the headphone market - strong revenue growth along with future earnings potential. In 2010, the company posted a net loss of $9.7 million on revenue of $160.6 million. Revenue was $118 million in 2009 and $80 million in 2008. But in the first quarter of 2011, the company managed a modest $1 million profit on revenue of $36 million, an improvement over the $808,000 loss on revenue of $21.7 million of revenue in the first quarter of 2010.

IPO Underwriters Heart Pandora, Natch

-- Whether or not a bank analyst currently likes Pandora's stock seems to depend on if that analyst's bank was an underwriter in Pandora's June IPO.

Pandora's quiet period ends Monday, meaning analysts at banks that underwrote or co-managed Pandora's IPO began their coverage of the company's stock. Four of the five analysts now covering Pandora are coming out of the gate with bullish sentiment and target prices well above the current market price. Citigroup is the most bullish with its $25 target price, followed by Wells Fargo with a $21 to $23 target range, JP Morgan at $22 and Morgan Stanley at $20. Only Stifel Nicolaus, with a price target of $18, came in below the current share price. All five price targets are above the IPO offering price of $16. William Blair, one of the co-managers of the IPO, initiated coverage with an outperfom rating. Outperform is a positive rating that typically falls between neutral and strong buy and implies the stock will perform better than similar stocks or the overall market.

Pandora (NYSE: P) briefly climbed to $18.75 early Monday but ended the day down 1.22% at $17.81.

Citigroup's note to clients outlined the six reasons for its rating: Pandora has a significant market opportunity; it is the leader in Internet radio; it has a "very robust growth profile;" mobile will help drive growth; the automotive segment has a "very sizeable" long-term growth opportunity; and its propriety Music Genome Project provides the company with a barrier to entry

Analysts previously covering the stock have been less enthusiastic. BTIG initiated coverage with a $5.50 price target and a sell rating. Albert Fried has a $13 price target and a sell rating while Capstone Investments has a $12 price target and a sell rating.

Bearish analysts and investors were given some fodder Friday when a Bloomberg news report quoted Pandora CEO Joe Kennedy as saying mobile listening hours are outpacing the company's ability to sell mobile ads.
( paidContent, Wall St. Cheat Sheet)

Cable Cutting Redux
-- As Peter Kafka writes at MediaMemo, "Time to get the cord-cutting headlines out again." According to Kafka, Bernstein analyst Craig Moffett is predicting upcoming second-quarter results from U.S. cable and satellite companies to reveal "dismal" pay TV subscriber figures. Comcast and Time Warner could lose big while satellite TV, Verizon and AT&T could add some subscribers. "Our conviction in a positive aggregate number is all but zero," says Moffett, who believes cord-cutting is a function of household formations and not platform substitution.

Cost would seem to be a prime cause for ceasing one's TV service during a recession - or whatever it is we're currently in. It just so happens that new research from Leichtman Research Group claims people who do not subscribe to multi-channel video services do so because of money, not online alternatives. Of consumers who get broadband service but not multi-channel video, only 5% of them are opting for online options and only 2% specifically mention Netflix as a reason. In contrast, broadband consumers without multi-channel TV service cite cost (28%), not watching much TV (26%) and having no need for the service (18%) as reasons for not subscribing to TV service.

But there are some cord-cutter believes out there. Last week SNL Kagan forecast that 12.1 million homes will receive TV and movies online rather than through cable by 2015. That would represent a huge spike from SNL Kagan's estimate of 2010 cord-cutters of 2.5 million homes.

This debate - whether or not cord-cutting is real and meaningful - gets to the heart of today's digital entertainment business. If consumers are using new Internet-based options to replace legacy entertainment options, that spells problems for entrenched companies. It would also spell trouble for businesses - like many in music - that reach potential consumers through these legacy platforms. In other words, TV's share of viewing hours is important not just for cable companies but also for the music companies that benefit from TV's promotional power. A consumer without a basic cable TV plan (or at least a digital antenna) is one less consumer watching "American Idol" or "The Voice" on live TV.
( MediaMemo)