Pandora Goes Public During Market Downturn -- Not That it Matters
-- Pandora's successful IPO arrives as the broader stock market has gone through a slump. But the timing isn't necessary bad. A cloudy market shouldn't be a problem for Pandora because its stock price is not closely related to the economic factors driving this downturn.
U.S. stocks fell below 12,000 last Friday and ended down for the sixth straight week - the longest slide for the Dow and S&P 500 since the fall of 2002. This week stocks are struggling again. The Dow was down 0.46% and the S&P was down 0.44% through the end of Wednesday.
Like other technology IPOs, Pandora's was driven by potential as much as - if not more than - past performance.
For an Internet company with no profits but high expectations, an IPO is a test of the market's belief in the company's ability to generate free cash flow in the future. Free cash flow is what's left from operating activities after using cash for working capital as well as capital expenditures (things like office furniture, computers and improvements to the space a company rents).
Stocks are frequently valued by estimating the present value of future free cash flow. But Pandora does not have positive free cash flow right now, although it probably will in a few years as it grows and is able to hold on to more of its revenue.
So how to value Pandora? When a company has no earnings or free cash flow to speak of, there are other ways to estimate a value of a share of stock. One method is to base the value on comparable public companies. There are few companies similar to Pandora to have been publicly traded. One was Napster, which acquired for $121 million by Best Buy in 2008. But it's not a good comparison. Napster's cost structure is more onerous than that of Pandora - it paid out about 70% of revenue to content owners, according to its last publicly released financial statements, and it doesn't have the same revenue growth potential.
An alternate method was taken by BTIG in its analysis of Pandora (the company pegged the value of the stock at about $5 and urged investors to avoid the IPO). BTIG forecasted the amount of earnings it expects Pandora to have in 2015 and worked backwards to arrive at a present value for an individual share.
For other big, publicly traded music companies, however, other factors come into play. Live Nation's share price is more a function of current economic conditions and near-term performance. When investors worry about consumer spending on out-of-home entertainment, Live Nation's stock can take a hit. Similarly, investors' concerns about the upcoming summer touring season would be reflected in changes in Live Nation's stock.
Live Nation, down just 4.73 this year, is doing better than many of its peer. Recreational activities stocks are down 14.76% through Wednesday compared to the scant declines by the S&P 500 (-0.66%) and Nasdaq (-0.81%). Vail Resorts, Inc. (down 14.03%), Carnival Corporation (down 24.53%) and Speedway Motorsports (down 13.51%) are among those down big this year.
In contrast, the technology sector is down 5.28% this year. Broadcasting and cable TV sector is up 5.58%.
Ironically, the declining market could be a good thing for Warner Music Group shareholders, who will get $8.25 per share when Access Industries' acquisition of the company is finalized later this year. The S&P 500 has dropped 5.9% and the technology-heavy Nasdaq composite is down 7.4% since the acquisition announcement was made May 6. Access Industries' winning bid essentially gives Warner shareholders a hedge against market downside.
The Cable Industry's Music Biz Schadenfreude
-- "Let's cheer up," Time Warner CEO Jeff Bewkes said Tuesday at the NCTA Cable Show in Chicago. "This is not the music industry; this is the cable industry." Bewkes, asked about the cable industry's competition from online video channels like Netflix and YouTube, assuaged fears of cord-cutting and told the audience everything in the cable industry is looking up. "The last thing people cut back on [during tough economic times] is their pay TV subscription," added Viacom CEO Phillippe Dauman.
Shazam Acquires Tunezee
-- Music discovery company Shazam has announced the acquisition of Tunezee for an undisclosed amount. The company's first acquisition has allowed it to add the feature Shazam LyricPlay to its Encore (paid) app for iOS and Android. LyricPlay automatically synchronizes lyrics with the music and uses animation and visualization for real-time viewing.
( Press release)
YouTube Advertisers up 100%
-- YouTube now has 20,000 advertisers, a 100% increase from last year. "The 20,000 advertisers are all separate companies that are running campaigns with us," YouTube's senior product manager, Phil Farhi, told AdAge. "Everything from major brands to the smaller, newer types of advertisers." Farhi added that 98 of the 100 companies in AdAge's top 100 advertisers list now advertise with YouTube.