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5 Reasons I’d Buy Today’s Pandora IPO, Even At New $16 Share & $2.5 Billion Valuation

image from www.google.com (UPDATE: Pandora opened above expectations at $20 a share and has ranged from $23 – $25 this morning.) Pandora raised the price of shares again for today's IPO to $16 giving the company a valuation just north of $2.5 billion.  That's usually a sign of investor interest, despite new warnings from several major analysts.  I understand the problem with Pandora's business model – the more people that listen, the higher they're royalty costs go. That's a real concern, but I'd still buy Pandora's IPO today if I could. Here are 5 reasons why:

  1. 75 million listeners, as of early this year – That's a sizable and growing community to monetize, and provides an almost insurmountable lead over possible competitors.
  2. Easy to use – Visit almost any office and you'll find people of all ages using Pandora, because it gives them a stream of music that they want to hear without a lot of hassle.
  3. It's passive – The more busy and complex our lives get, the more attractive passive services are  Passive customers are also loyal customers. It's too much work to change,  
  4. Music discovery. – Ultimately Pandira will attract more support from record labels.  Spotify, music streaming and cloud lockers are great for listening to music that you already know. Pandora mixes what you know with things you might want to hear.
  5. Tim Westergren – No one has worked in this space longer or spends more time listening his users than Westergren. He hung in when Pandora was almost out of money, assembled a strong team and has the vision and staying power to take it further.
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11 Comments

  1. 3 reasons why I would not:
    1. Majors decide the life and death of music services
    2. Music hasn’t been a good sector to invest for years (especially when public)
    3. Pandora will have to negotiate (See how it works for a champion like Spotify) for every new single market it will want to address. With cash available, demands will be higher.

  2. I agree with Sylvain
    Pandora has changed my life, but I won’t buy the stock as there are far too many limitations on revenue growth without changing the character of the product. I stream music at the office on my computer, I stream music to my smart phone when I’m driving and when I go for runs outside. The problem with Pandora as a public company long term comes down to limitations on revenue growth. I fear the only way Pandora can be a successful stock is if they transition into subscription services as the primary revenue stream. The magic of Pandora is that its free. I for one am a cheap bastard and will stop using Pandora if I have to pay, or have limited hours of use that I would regularly surpass.
    The great example is the recent NYTimes migration to a paywall online. I was an avid reader of the NYTimes online and have completely stopped using it even though I can access a limited number of articles per month. My irrational fear as a consumer is that I’ll use up my access to articles and be precluded from reading that one article that is to die for. It creates consumer paralysis and I for one have stopped using their services. It would be a shame if Pandora had to change its character to please the share holders.
    That said, congratulations Pandora you have more than arrived and long ago you changed the world.

  3. i’m with bruce when i told everybody pandora would be a solid buy in the near term. their long term prospects are a bit hazy and the space is only getting more crowded, but based on popular sentiment alone, you knew the public was going to gravitate to this stock.

  4. Maybe it’s a bit naive, but I buy stocks the same way I support artists. If I like what the artist is doing, or I believe it what they’re doing, then I’ll take part in their KickStartr/PledgeMusic campaign.
    In a rather symbolic way, buying Pandora stock is another example of a direct-to-fan campaign.
    I like what Pandora does, I support their goals/missions, I bought their stock.

  5. Pandora has been a game changer in my household. Having said that, the ads are unobtrusive enough to keep me listening without paying, and to be perfectly honest — echoing @windingforward — if the ads became nuisance enough to be profitable, I’d migrate back to any internet radio station on my appleTV that didn’t have ads. Could be a tough one after the day’s candle stick spike on its chart.

  6. Can you short it? You can’t LinkedIn and I know many a smart financial players that wish they could. Their revenues don’t match up.

  7. The signs are all there… irrational buying, the belief that traditional criteria no longer apply, etc. Of course, a bubble is a great time to make your fortune… but only if you sell before the crash. Few people do. And the great investors of the age (Buffet et al) wouldn’t even try. Fun to watch though.

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