By all accounts, tomorrow is the day Pandora puts 14.7 million shares of stock on sale to the public, equal to about 20% of its total equity. At an offering price of between $10 - $12 a share, that would raise around $146 million and value the company at around $1.7 billion.
But there's no shortage of questions swirling before tomorrow's opening bell. Here are the five we're hearing the most:
1. Is the Price Too High?
Some analysts are raising legitimate concerns about Pandora's ability to turn a profit, given the fact that about 50% of its revenue is spent on music royalties, at rates that are likely to only increase in the years ahead. And Pandora itself warns investors that rates will likely fall further until late next year at the earliest. So this is clearly more about potential than current value. Analyst Richard Greenfield estimates Pandora's per-share revenue will be around $1.36 in the next year, and figures the stock should be priced more like $4 to $5 a share. However the week before the planned IPO, Pandora itself raised the buy-in from $7 - $9 a share to $10 - $12 a share. So watching how Pandora's stock prices fluctuate tomorrow, and the days after, will be a telling sign of whether others agree.
2. How Will Pandora Address Revenue Concerns?
The press analysis in advance of the IPO have primarily focused on the fact that the more Pandora is used, the more the company has to pay in music royalties. To be sure, that's a challenge. But few remember part of Pandora's deal with SoundExchange says that it must either pay a per-stream royalty or a flat rate of 25% of revenues, whichever is higher. That means the key to Pandora's success is not in signing up more users, but in increasing the value of the ads it sells. Again, no small challenge. Pandora's not been talking about how it plans to accomplish this due to its pre-IPO quiet period. Once the bell rings tomorrow, expect founder Tim Westergren and CEO Joe Kennedy to start offering another side of the story.
3. How Will Pandora Fare in the Broader Tech IPO Trend?
Pandora is joining a fraternity of tech companies eying public offerings in what is either the start of a new digital economy or the beginning of the next tech bubble, depending on whom you ask. LinkedIn went public in May. Groupon is next. Facebook is rumored to be eying a $100 billion IPO sometime this fall. Zynga has been mentioned as a possible entrant as well. Regardless of how different these companies are, their IPO and subsequent trading prices will be forever compared to one another as evidence of either the success or failure of this strategy in today's economic climate. For instance, after its May IPO, LinkedIn saw its U.S. user base jump 6.7%, according to a Bloomberg report that cited Comscore data. If Pandora doesn't see a similar bump, count on someone writing a story about it as a sign of Pandora's decline.
4. What Impact Will It Have on the Radio Market?
If Pandora gets the market capitalization it's hoping for, it will place it squarely in the top four of the nationwide radio operators, along with Sirius XM, Clear Channel and CBS Radio. Start looking for comparisons between Pandora's stock and that of Sirius XM. And start looking for increased competition for advertising dollars between them all.
5. What Will They Do With The Money?
About half of the stock going up for sale tomorrow comes from Pandora's original investors, meaning they'll get their payday. According to the company's regulatory filings, around 25% of the proceeds will go towards paying unpaid dividends. The rest is for "general corporate purposes," which means basically keeping the lights on as it continues to lose money in the next year. But some of that has got to go into investing in some kind of growth opportunities, right? Expanded ad sales staff? Expansion into new markets or content? How Pandora spends will be as closely watched as what it owes, and as a public company, this will be an area of great scrutiny.