Pandora’s IPO

Yesterday, Pandora went public. Wired summarized it as such:

Pandora, the internet radio company, became the latest web company to go public Wednesday in what has become a full-blown IPO gold rush.

After pricing its shares at $16, Pandora’s [P] stock opened at $20 and then immediately soared to $26, an increase of more than 60 percent. In mid-day trading, the company’s shares had fallen below $20, with major market indices down over 1 percent, as protests over Greece’s austerity plan turned violent.

Like several of its web IPO brethren, Pandora currently loses money. But that didn’t stop the company from raising $235 million at the $16 offering price, well higher than expected range of $10-$12 per share. At the offering price, Pandora was valued at $2.6 billion.

Wired’s late update:

Pandora shares ended regular session trading at $17.42, nearly nine percent higher than the $16 offering price.

Which is code for “See that $26 price? Those people are complete morons.”

Here’s my best stock advice that I am qualified to give: When people refer to a gold rush, run away. Run far far away.  Remember the California Gold Rush? Where most people barely made it out breaking even? That’s the mental image you should have.

Bob Lefsetz chimes in at the always good Big Picture with a long piece that is worth reading, showing that you can write about such an event without cheerleading about the gold rush:

This is all about name-recognition. Investors are stupid. They know little about the products of the companies they lay their dollars down for. They’re acting on buzz.

And buzz has nothing to do with profits. Certainly not long term.

What we’ve got here is a phenomenal job of brand-building. Tim Westergren, like a carnival barker went out and sold a service based on a combination of hucksterism and I’m on your side duplicity. If Mr. Westergren truly cared about music, he’d be a manager. I haven’t seen someone this dedicated to building something from zero to superstar status in eons. But there’s too little money actually promoting music, building stars, and talent talks back, digits do not.

In other words, it’s really damn hard to nurture and break talent.

It’s much easier to build upon the hard work of others. Which is why record labels/rights holders demand so much from Pandora, after all, it’s built upon the equity they’ve created, without the music, Pandora is nothing.

Analysts have noted this. Pandora’s lack of scalability, its huge rights payments.

Lefsetz goes on to say the service itself is “crap”, a conclusion I agree with to a lesser degree. Wiki notes that Slacker has 2.4 million songs to Pandora’s 700,000, which certainly fits with the degree of repetition I’ve found. But the real important point, in my mind, is that Pandora is a money losing machine. And Pandora’s biggest problem is its royalty payments, so increasing their library may push it further into the red.

So, you have a company that has lost money since its inception, stated it was probably going to go out of business in 2008, and has continued to lose money since. It is in a crowded field which will only get more crowded. And yet, investors will happily spend money to value them at $2.6billion dollars. Why is it that the word IPO provokes such irrationality?


About nickgb

Computer programmer, lawyer, and aficionado of many dorky things that, in reality, you probably can't be an "aficionado" of. nickgb is a fanboy of Whedon, Sorkin, Gary Cole, Matthew Perry, and anything that brings together casts of his favorite shows (which, by definition, were all canceled "way too early").
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One Response to Pandora’s IPO

  1. Derrick says:

    Majoring in Finance for both undergraduate and my MBA, I have come to the sad conclusion that the market is inherently dumb.

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