24/7 Wall St.

The world around venture capital sometimes creates some very interesting reading when you look at private company valuations versus public company valuations. In this case, it is in the online streaming music service of Spotify. It is hard to know what the valuation should be without having access to the books, but a $4 billion valuation should catch the eyes of Pandora Media Inc. (NYSE: P) and also of Sirius XM Satellite Holdings Inc. (NASDAQ: SIRI).

Reuters, the Wall Street Journal, and others have thrown some figures out showing that a $250 million capital raise gave Spotify a value of more than $4 billion. When currencies are translated, we have seen that Spotify generated revenue of close to $570 million in 2012 with what may be a loss of about $77 million. Spotify is also shown to have 24 million active users and 6 million who pay for a premium service. So how does this add in a relative value basis?

Pandora Media Inc. (NYSE: P) recently released its earnings and disclosed that it had 70.9 million active users and it said it is on track to generate roughly $660 million in revenue this year after having generated $427 million in 2012. Pandora just became profitable on normalized operations this year. Its market cap is $5.1 billion, but keep in mind that shares have tripled off their lows this year.

Sirius XM Holdings Inc. (NASDAQ: SIRI) is in a different class because it is almost all subscriber-generated. It is the big kahuna with a market cap of over $22 billion and its latest press release showed has that it has 25.6 million subscribers. Sirius is also profitable, and sales were $3.4 billion in 2012 and expected to be almost $3.8 billion in 2013.

Again, a problem in analyzing the current value is not knowing the current financial expectations of Spotify. That being said, Spotify is valued at close to $166 per active user versus close to $72 per active user of Pandora. We do not truly want to do the direct comparison for Sirius XM due to its subscriber only model, but that would be worth about $882 per subscriber in case you really had to know.

On Pandora, we would also point out that in the first nine months of 2013, some $85.2 million of the revenue came from subscribers versus its $463 million in total revenue. We do not have any comparable breakdowns for Spotify.

Here is where the rub comes in on valuing a company like Spotify at $4 billion. We cannot use a Sirius XM comparison as of now, but Pandora’s $5.1 billion is after its shares tripled this year. We will have to wait to see final sales and income numbers before making any final verdict here. Just keep in mind that for a venture-backer to pay a $4 billion valuation today it means they expect the value to be $5 billion, $6 billion, or far more when it comes time to sell or go public tomorrow.