Pandora’s Valuation Looks More Tied to SIRIUS Rather Than a Threat to SIRIUS (SIRI, P)

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Pandora Media Inc. (NYSE: P) is getting a high valuation for its Music Genome Project ahead of its initial public offering.   What is interesting is that many investors believe that Pandora is a significant threat to SIRIUS XM Radio Inc. (NASDAQ: SIRI) after a meteoric recovery pop has been seen there.  Even if SIRIUS XM cannot ignore Pandora as a threat, it turns out that the great rise in SIRIUS XM shares may actually be the catalyst driving Pandora valuation today rather than Pandora’s coming IPO threatening SIRIUS XM shares.

SIRIUS caters to a large segment of America that drives more than normal and that wants to have premium (and often more colorful) audio entertainment.  Pandora sets up Internet radio stations based individual songs and artists and is gradually entering the auto-segment.

Now Pandora may have a value at its IPO of $1.3 billion or more.  Pandora could always try to launch its own exclusive content, but SIRIUS XM has a lock on most sports venue events and has a lock on many premium hosts.  Our own take is that Pandora is a more narrow niche than SIRIUS but is competition for that old AM/FM terrestrial-based radio stations. This last year was about $137.8 million as far as revenues, but about 90% was ad-generated revenue.  Only about $18.4 million of its sales came from subscription services. SIRIUS XM is almost entirely subscriber-based revenue.  From an outsider’s viewpoint, it sure seems that Pandora’s royalty payments rise more than SIRIUS XM’s for music.

Pandora is indicated to price some 13.7 million shares between $7.00 and $9.00 per share that has been indicated gets that value above $140 million if it hits the top of the range and if it gets the overallotment option exercised.  Pandora Media, Inc. is offering 5,000,682 shares itself, while selling stockholders are offering 8,683,318 shares of common stock.  This is well over $1 billion in the value of its stock market capitalization as less than 10% of the company’s shares will be in the public float like we have seen with LinkedIn Corporation (NYSE: LNKD) and like we expect to see from Groupon after it disclosed its IPO paperwork last week.

Pandora will have to aggressively increase its number of listeners for this to come to fruition.  As its users increase their time spent on each channel, it drives up the operating costs from royalty payments.  Our take is that subscriber growth is how the company can increase its chances of profitability.  Mel Karmazin’s SIRIUS XM is ready to even start raising prices moderately after the antitrust exceptions expire for that effort.

SIRIUS XM has a market cap of over $8 billion now and its sales were over $2.8 billion in 2010 and 2011 estimates are just over $3 billion from Thomson Reuters.  The difference is that SIRIUS can no longer double revenues, but the question comes down to just how much Pandora can ramp sales.  If sales double in each the current year and the next current year, then the company’s revenues will get up to $552 million.  SIRIUS XM is already now profitable and we have no clue whether or not two more years of doubling revenue will generate profits for Pandora.

By going with a low-float share count it is almost certain that Pandora will get a high premium on its valuations.  Our take is that Pandora is winning from what has been a runaway value at SIRIUS XM and at other dot-com era IPO performances.  That does not imply that Pandora can actually unseat SIRIUS XM.

Pandora’s venture backers are Walden Venture Capital, Greylock Partners, and Crosslink Capital; while SIRIUS XM has Liberty Media’s John Malone behind it. There were also reports in recent days that Pandora secured a $30 million credit facility with affiliates of J.P. Morgan and Morgan Stanley, which are each in the book-running group of underwriters with Citigroup for its IPO.  Co-managers are currently expected to be William Blair, Stifel Nicolaus Weisel, and Wells Fargo Securities.

Pandora is also getting a special and rare one-letter stock ticker.  The shares will trade under the ticker “P” on the New York Stock Exchange.  SIRIUS shares recently peaked at $2.44 and shares have slid back down to under $2.20.  Our take is that Pandora is not responsible for the most rent 10% pullback in the stock.  We just think that SIRIUS XM’s valuation caught up to it.

The most recent Pandora amended SEC filing for its IPO is here.

JON C. OGG

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