Pandora IPO: Bulls vs. Bears
-- Pandora is feeling good about its initial public offering of common stock. The company has upped the number of shares and its target price for its IPO, according to a revised S-1 SEC filing. The original plan was to sell 13.7 million shares from $7 to $9. But the company has increased the shares to 14.7 million and is looking for a range of $10 to $12. It will trade on the New York Stock Exchange under the symbol "P."
While the media is covering Pandora like hawks, BTIG analyst Richard Greenfield is advising clients to avoid Pandora's IPO. "Put simply, the revenue/earnings leverage from growing users/usage is simply not enough to scale earnings relative to the IPO's proposed valuation," he wrote in a pre-IPO report on the company. In other words, BTIG thinks the proposed IPO price of $10 to $12 is just too high.
It's not that BTIG is bearish on Pandora's ability to grow listening hours and revenue. To the contrary. BTIG's forecast has revenue growing 150%, 92%, 62%, 61% and 56% in the next five fiscal years and guesses Pandora will have 193 million registered users at the end of fiscal 2015.
But BTIG has some very valid concerns that revenue growth will outpace the cost of acquiring content. It estimates Pandora gets a $43 CPM for PCs and just $20 CPM for mobile, but it doesn't see much growth in the future. That difference is a big deal when so much of Pandora's listening and growth comes from mobile devices. Then there's the question mark around the potential of audio advertising, which is vital to use in the automobile. As I pointed out a week ago, Pandora has barely improved the revenue it generates per listening hour over the last 12 months. It simply needs to do a better job generating revenue from a mobile-heavy mix of listener hours.
Even if it achieves tremendous growth, Pandora will have difficulty achieving substantial earnings, BTIG argues. It forecasts EBITDA of $80 million on revenues of $1.08 billion in fiscal 2015. Using a conservative multiplier (15x) to value the company based on EBITDA, and adjusting for a hoped-for 15% return on investment, BTIG places the IPO price at "no more than $4.50." After 2015, the analysts wisely note, webcasters' rates could increase, thus driving up Pandora's content acquisition costs, reducing EBITDA and lowering the company's target price.
If you're concerned about thin margins, a valuation well over $1 billion won't sit well. After the IPO, Pandora will have 159.7 million shares outstanding (plus 37.6 million issuable from stock options and another 2.2 million could be optioned by the IPO's underwriter). At $11 per share (the middle of the IPO range), Pandora would have a market capitalization of $2.1 billion. Even at BTIG's high-end target of $5 per share, the market capitalization is still $960 million.
However, BTIG's assessment of the competition is on less stable footing. BTIG lumps all digital music into the same category. And while there are indeed many services in the broader digital music marketplace, one shouldn't compare apples and oranges. Pandora and other personalized Internet radio services occupy a specific space in the marketplace that has proven mainstream appeal. Paid subscription services that offer unlimited access to a wide range of songs are still a niche product in search of a wider audience. Cloud storage services like Apple's iCloud and Amazon's Cloud Drive/Cloud Player that emphasize ownership are also in a different product category.
Pandora's main competition, however, is satellite radio company Sirius XM, terrestrial radio and other services that offer a more passive listening experience. While subscription services offer radio-like features, they are neither marketed as nor seen by consumers as Internet radio services. And they have a lot of work to do before they begin eating into Pandora's non-interactive listening hours.
A few things are certain. Pandora is a great product. It has an incredible following. It's a leader in Internet radio. The Pandora brand is as strong as any in digital music.
And one main point is probable, but not certain: Pandora will become a profitable business in the next four or five years.
But there is one uncertainty that BTIG is correct about: Just because Pandora has a lot going for it doesn't mean it's a good investment at the IPO price.
By the way, the media keeps getting the numbers wrong when talking about how much money Pandora will raise from this IPO. Pandora is selling only six million of the 14.7 million shares being offered. The rest are being sold by existing shareholders -Pandora won't get that cash. After deducting IPO-related costs, Pandora expects to raise $57.6 million if shares sell for $11 (or $80.1 million if the underwriters' option is exercised).
Is the Internet a Basic Human Right (Or Just Something to Sate OCD)?
-- A week after the United Nations declared the Internet to be a basic human right, the Australian attorney general said disconnecting the Internet services of music and movie pirates would not violate either international law or human rights. In spite of that stance, the Australian music industry is reported to have backed away from calling for convicted digital pirates to be disconnected from the Internet as a form of punishment and deterrence.
Issued June 3, the United Nations report by the Special Rapporteur (who conducts fact-finding missions and investigates allegations of human rights violations) says calls the Internet "one of the most powerful instruments of the 21st century for increasing transparency in the conduct of the powerful, access to information, and for facilitating active citizen participation in building democratic societies." While the report recognizes there are some instances that call for restrictions (child pornography and hate speech, for example), it argues that some states restrict and manipulate Internet access in ways that are "clearly unnecessary and disproportionate to achieving the intended aim."
In terms of punishment for piracy, the report says the Special Rapporteur is "alarmed" by proposals and graduated response measures to disconnect Internet users due to intellectual property violations.
( Sydney Morning Herald)
Netflix, iPad Leaders of the (Streaming TV) Pack
-- Netflix and the iPad are leading streaming TV, says CBS's chief research officer, David Poltrack. Speaking at a Collaborative Alliance event, Poltrack said that 43% of research participants were Netflix users. A year ago Netflix users comprised such a small group CBS tucked them away in an "other" group.
But CBS found people were not interested in getting Internet access through their TVs whereas two years ago "people thought getting TV on the Internet was very cool." Why the change? Today far more people have Internet access on mobile phones and tablets.