How Pandora could become a $70 stock (in a few years)

Before we begin today’s regularly scheduled blog post, I would like to point out something important about the Pandora IPO situation that no one seems to have noticed: Except for costs associated with the process of going public, Pandora is profitable — and has been for the past year and a half!

According to the quarter-by-quarter level detail in their most-recent S-1 filing, Pandora was profitable on an operating basis (i.e., approx. EBITDA, and ignoring such issues as the repricing of warrants) in its fiscal Q4 2010 and again in Q2 2011 and Q3 2011. At that point, the company started ramping up its G&A expenses to prepare for its IPO.

Over the past 18 months, Pandora has lost $3 million on an operating basis…but that, I believe, includes about $8 million in costs associated with the IPO (e.g., preparing to be able to comply with Sarbanes–Oxley, etc.). On what I would personally consider a true operating basis, they’re now consistently profitable.

==============

As you know, Pandora is expected to debut on the NYSE this week at an offering price of $10 to $12 per share, which would put the company valuation at up to $2 billion. As discussed here in this space last week, that would make Pandora the fifth most-valuable radio company in America in terms of enterprise value (after Sirius XM, Clear Channel Radio, CBS Radio, and the upcoming Cumulus-Citadel combination).

Yesterday (6/13), some pessimists — primarily a couple of analysts from BTIG and Morningstar — were in the news, pointing out primarily that Pandora’s business model lacks the economies of scale, at least in terms of its music royalty licenses, that Internet investors like to see.

That’s true. It’s also true that Pandora’s sound recordings performance license rate is only set through 2015 and will need to be either renegotiated, readjucated, or relegislated for the 2016-2020 period, it’s true that broadcast radio is still a reasonably healthy business that isn’t going to roll over or disappear, and it’s true that other competitors also exist. So there’s an argument to be made that a $10-12 stock price today might be rich.

On the other hand, I believe there’s also a case that can be made that if Pandora can continue to grow its audience, while slowly increasing its advertising spot loads and CPMs and keeping its other costs in line, it could also reasonably be a $70 stock within the next few years.

Here’s how that could happen:

First, Pandora’s audience would have to continue to grow, although not necessarily at the 100% to 110% per year rates it’s seen the past two years. Let’s say its AQH grows 60% this year, then 50%, 35%, and 20% in subsequent years. That would give it a Mon-Sun 6a-12m AQH in 2014 of about 2 million listeners. Conceivable. (About the size of the Cumulus-Citadel AQH.)

Then, since Pandora is only running about four 20-second commercials per hour (compared to broadcast radio’s 10 to 14 minutes per hour), let’s assume it can get away with adding one unit per hour EACH YEAR, and that as its effectiveness as an ad medium gets proven, its CPMs can also be grown 5-8% per year.

Multiply those two factors together, assuming reasonable continued increases in subscription revenues, and you can foresee that Pandora’s 2014 revenues could be in the range of $1.3 billion. (That’s pretty far behind Sirius XM’s current revenues of almost $3 billion and Clear Channel’s $2.4 billion, and in the range of CBS Radio and Cumulus-Citadel.)

Now let’s get through the dicey part: If Pandora’s audience quadruples during the next four years, their royalty payments (because the rate goes up each year) are going to quintuple. However, that would only be about $360 million in 2014 — over a quarter of their revenues, yes, and inequitable compared to other forms of radio like satellite radio, but not a company-killer the way some analysts would have you believe.

Pandora’s marketing and sales expenses were 73% of revenues in roughly 2008, 35% in 2009, and 30% in 2010. Let’s assume that if their sales staff gets more efficient, that percentage could drop about a point a year to 25% of revenues by 2014.

And finally, let’s assume they might be able to keep a reasonable handle on their other expenses (cost of revenue, product development, and G&A) ($32 million last year) — perhaps with each category growing at no more than 10-20% per year.

Add it up, and that gives you total expenses for 2014 of about $750 million. That leaves a potential net profit from operations of $550 million. A company growing at that rate could be worth a 20x multiple, or $11 billion.

Divide that valuation by 160 million shares outstanding and you get a potential stock price of about $70.

I’m not saying that’s a sure bet. I’m not saying that Pandora might not pull a Friendster or a MySpace and find itself supplanted by a next-generation Internet radio property. I’m not saying I’d pay $70 for their stock this week.

But I do see consumers moving to Internet-delivered radio for their music radio listening needs, because it’s a technically-better transmission mechanism (just as FM was technically better for music than AM; FM had stereo and Internet has personalization). And Pandora clearly has a leading brand name in the space.

So I do see a path by which this valuation could, within the next few years, happen.

Here’s the above analysis in spreadsheet form:

Share this

Comments

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.

تفسير الاحلام حرف خ الخاء
thank you for such very good an amazing post i'm so happy

They can also change their private information with this Sears Employee Portal. Since you are here, we presume that you want to know the process of 88Sears login or 88Sears Associate Login 88sears login

we tend to truly wish to serve you the foremost effective things with 100% satisfactions. http://www.unitedcheckcashing.com it's very taxing to say once exactly got to be compelled to cash your check. usually it ought to very difficult to cash if it isn't official hours.24 hour check cashing

istanamurah.com adalah website yang menjual berbagai macam produk seperti alatfitness.net dan juga cetakankue.net dan juga treadmill.co.id pembelian produk di website tersebut bisa diliat juga di bisagrosir.com disana juga menjual happy call dengan harga halomurah.com dan produk tersebut menjadi produk yang larismu.com di toko tersebut. selain situs ter sebut anda juga bisa mengunjungi situs indonetshop.com karena di sana menjual grosirfitnes.com dengan harga yang cukup maxgrosir.com

I wanted to buy Pandora bracelet for my girl and found this post. I thank you, it was informative. I know how to write a 500 word essay fast and I can help you too.

dengan tehnologi saat ini anda dengan mudah menemukan penjualan obat aborsi dengan mengetik di google contoh nya jual obat aborsi , jual obat aborsi bandung , jual obat aborsi batam , jual obat aborsi murah , jual obat aborsi jakarta , jual obat aborsi jogja seperti ini anda menemukan apa yang anda cara tentang obat aborsi dengan pil cytotec.

Apple Watch 3

Everything you need to know about the new Apple Watch 3!

There is fantastic ipad app check it.
Best iPad Apps Download

THERE IS BEST IPHONE8 2017 APP CHECT OUT
Best iPhone 8 Apps

there is something new iphone 8 app chect out

That is really cruesal when you are using latest iOS system and some of the people say that iPhone 7 Features are still best as compare to latest iphone 8.

is there anyone who is working on iPhone 8 news so far? I need to know something about it.

Todya is the biggest day for mac user just because of Time Machine for Mac has been launched from apple. Where you can cover your all data.

Everytime when I just looking around myself and see that people are buying iphone without reading iPhone 8 News and reviews. So be careful guys don't buy anything without any reviews from real buyers.

Can somebody gets me a that kind of information regarding to ios system, check this one: http://exposure-magazine.com/ios-10-3-security-holes-plugged-security-update-from-apple/

Apple VR? is the latest update from iphone and it will help you to enjoy the movie theater at your home.

I just heard someone is looking for VR update from Apple. Here is the link you can read
What Apple making progress with VR?

Sometime when you are feeling some sad feeling with your phone, then suddenly got a news from apple that we are launching latest iOS system i mean iPhone 8 that is really good thing for me. Thanks for sharing

Now you are going to rock the world because i am sharing how you can make huge money to sell mobile apps for local business. Read carefully and see the magic and rock the world again.

So interesting topic for bussines man especially for newbies. I was searching VPN for Mac but sudden land on this page. I love your blog.

Are you looking to dough into a bank account, the whole quantity normally cannot be immediately opened; there may be additionally a ready technology for the test to clear? check casher Philadelphia

total collection koimoi hungama
box office collection koimoi hungama

The article you have shared here very good. This is really interesting information for me. Thanks for sharing!
192.168.1.1 login

Obat radang tenggorokan di apotik merk apa sih yang bagus dan berkhasiat atasi sakit tenggorokan ?

Nice article! I am very happy because I can do this biog site commrnt.Now follow up check cashing near me thanks for nice work.

Hướng dẫn bạn cách quan hệ với gái còn trinh http://drdonghung.vn/cach-quan-he-lan-dau-voi-gai-con-trinh-dung-cach-khong-dau.html giúp cả 2 bạn đạt được những giây phút hạnh phúc trong tình yêu.

Obat rematik di apotik paling bagus apa ya namanya ?

Làm to dương vật - Dịch vụ giúp nam giới lấy lại sự tự tin về "cậu nhỏ" của mình, hãy tìm hiểu dịch vụ làm to dương vật gấp 1,5 lần tại http://drdonghung.vn/ nhé.

Obat bopeng di apotik yang bagus dan sudah terbukti berkhasiat apa namanya ? Yang tahu, plisss banget kasih tau gue !!! http://ow.ly/CqBu30dqzAZ Obat bopeng

We are here to help you out with the whole procedure to Download Microsoft Office online, We not only fix your MS office setup related issues but will guide with how to get started with your new Office 2016 product once it get installed successfully. So why are you waiting for just ask whatever question you have via live chat online. visit officecom/setup More Info Call Now 1 855 869 6776 http://www.office-setup-help.com http://www.office-setup-help.us http://www.oofficee.com/setup http://www.officesetuphelp.us
www.office.com/setup

Hey, Although when I was held right after your blog using the engines like google while attempting to find this amazing relatively valuable write-up and your write-up is usually clearly rather completely gratifying to be able to our view. Time Attendance System

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.

Post new comment

  • Web page addresses and e-mail addresses turn into links automatically.
  • Allowed HTML tags: <a> <em> <strong> <cite> <code> <ul> <ol> <li> <dl> <dt> <dd>
  • Lines and paragraphs break automatically.

More information about formatting options

By submitting this form, you accept the Mollom privacy policy.