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Six reasons to buy shares in Pandora’s IPO

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Streaming radio company Pandora filed for an IPO on Feb. 11, and I’ve been torn on whether or not I’m bullish on the company’s future ever since. If the Oakland, Calif., company didn’t have to tread the recording industry’s shark-infested waters, I wouldn’t hesitate to hit the thumbs-up button. Record labels seem to have a vampiric knack for bleeding companies dry, though.

Still, Pandora’s been around for six years, and who’s to say they might not be the market leader in radio for the next few decades? Here are six reasons to consider buying shares in Pandora’s IPO:

1) Market share. According to a November 2010 report by Ando Media, Pandora controls more than 50 percent of the Internet radio market. Already, the company claims 80 million registered users – a number that’s growing at a rate of one new user per second on average.

2) Quality of service. I’ve used the hell out of Pandora for the past two years, and it offers a truly great listening experience. Just type in the name of a song or artist you like, and Pandora will “build” you a custom radio station that plays similar songs by similar artists. Built around a “musicological database” that analyzes 480 or so song attributes, the service has a knack for playing music that feels like it was written for your tastes. It’s all backed by a giant catalog of music, too, with Pandora offering more than 800,000 songs from 80,000+ artists. Companies that offer great products that are difficult to replicate will always outperform companies that offer great products that are easy to replicate.

3) Mobile web = the future. There were 103 million consumer mobile devices with Internet access in 2010 in the U.S., according to research firm IDC. That number is expected to grow by 65+ percent to 168 million in 2014, and Pandora’s got a lock on a lot of those devices. Indeed, it’s one of the Top Five most popular apps across all four of the major smartphone platforms. As the smartphone industry expands so, too, will Pandora’s scope.

4) Mobile advertising expected to grow at a 36 percent compound annual growth rate through 2014. The mobile advertising industry was worth $743 million in 2010. eMarketer predicts it will be worth $2.5 billion in 2014. Mobile audio marketing will grow much slower (about 8 percent over the next three years), but Pandora’s display ads could prove just as powerful as their audio ads. I normally abhor ads in apps, but I took the time to sign up for LivingSocial’s coupon emails while using Pandora recently – in part because I saw their ad about 40 times while trying to view cover art for albums I was listening to on Pandora.

5) Future evolution. One of the most difficult mental hurdles investors have to get over when looking at a tech IPO is the ability for a young company to move in new directions. Who would have thought in 2001, for instance, that Amazon would evolve to offer cloud computing or that eBay’s PayPal would one day be operating in 190 countries? I see room for profitable evolution at Pandora. In particular, the company could offer premium playlist services that let users build stations by hand; song-by-song, artist-by-artist. If I could access specific songs via the cloud when I wanted to hear them (and put them on repeat), I’d be willing to pay for that service because I could, in effect, eliminate the need to buy and house my own digital music collection.

6) Revenue growth. Pandora’s yet to post a profit, but the company has shown impressive revenue growth. In the fiscal year ended Jan. 31, Pandora posted revenues of more than $55 million compared to 2009 revenues of $19 million. The company’s net loss shrank from $18 million in 2009 to $328,000 during the nine months ended Oct. 31, 2010. The trend is pointing up. If Pandora makes some wise acquisitions with its IPO windfall (as executives indicated they might), that trend could start looking a whole lot better in the months and years to come.

The full text of Pandora’s S1 filing appears below:

pandora s1

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3 Responses to Six reasons to buy shares in Pandora’s IPO

  1. james moylan says:

    I have a web site where I research stocks under five dollars. I have many years of experience with these type of stocks. I would like to comment about pandora new issues are almost always bad investments the vast majority of these stocks are way over priced on purpose. I always recommend that investors stay away from these stocks

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