Is Pandora's IPO Good or Bad for Sirius XM?

Pandora Media is inching closer to its IPO. The music-streaming superstar updated its anticipated offering on Thursday, aiming to sell 13.7 million shares -- though underwriters can bump that up to 15.7 million. The initial pricing range per share is now $7 to $9, so we're talking about as little as $96 million to as much as $142 million being raised in the deal.

If that seems reasonable, keep in mind that less than a tenth of the company's stock is being sold in the IPO. There will be a total of nearly 160.8 million shares outstanding if the overallotment is exercised, implying a value of $1.45 billion at the $9 price point. Tack on the real possibility that the deal prices higher -- and the even greater likelihood that the shares will pop higher out of the gate -- and Pandora's valuation now becomes a matter of billions.

Will Pandora's trading debut help or hurt satellite-radio comeback kid Sirius XM Radio (Nasdaq: SIRI  ) ? Will it have an impact at all? Before we address the issue, it's important to take a step back to see where each company is coming from.

The fall and rise of satellite radio
Sirius XM has come a long way since its stock bottomed out at $0.05 a little more than two years ago. The cash-strapped company was facing debt milestones and content provider payments it couldn't afford, and CEO Mel Karmazin warned of a possible bankruptcy filing.

Liberty Capital (Nasdaq: LCAPA  ) stepped in to save the day, but not before walking away with a 40% preferred-share stake in the company.

The now-profitable and fiscally resilient Sirius XM has the equivalent of 6.5 billion shares outstanding. In other words, Sirius XM's success isn't sneaking up on anyone anymore.

Even with the stock taking an 8% hit last week on weak car sales, Sirius XM's packing a market cap of $14 billion, and an enterprise value of $17 billion. For those scoring at home, that's more than all of the major publicly traded terrestrial radio operators combined.

This doesn't mean that Sirius XM hasn't earned its rich valuation. It may only reach 20.6 million subscribers and their passengers -- a fraction of terrestrial radio's audience -- but we're talking about 20.6 million people willing to pay for premium radio.

Unlike traditional radio stations, which rely almost entirely on advertisers to pay the bills, just 2% of Sirius XM's revenue mix comes from sponsored spots. Sirius XM's bread and butter has always been subscriptions, which average about $11 a month across all of the company's activated receivers. This dynamic makes Sirius XM a steadier bet than radio advertisers, at a time when skeptics fear that more traditional media advertising dollars will flock online.

In short, Sirius XM is expensive -- but worth it.

Taking a peek inside Pandora's box
Still, in terms of musical experiences, it's hard to top Pandora. The company has spent the last decade dissecting the intrinsic qualities of music to crank out personalized streams. Enter a single song or a quick scan of your Facebook favorites, and Pandora's off, adapting a playlist in real time just for you.

The service's popularity is contagious. There are now more than 90 million registered users, and Pandora accounts for half of the massive Internet radio listening market. Beyond passive PC streaming, the Pandora mobile app is available across all five leading smartphone platforms. On iOS and Android, Pandora consistently remains at the top of music download lists. Apps are also available for Research In Motion's (Nasdaq: RIMM  ) BlackBerry, Hewlett-Packard's (NYSE: HPQ  ) webOS-fueled Palm Pre, and Microsoft's (Nasdaq: MSFT  ) Windows Mobile.

Pandora is a largely free service, wedging brief ads between the content to offset its costs. Revenue spiked 150% to $137.8 million last year, and its deficit narrowed substantially. This was a welcome trend when Pandora filed to go public earlier this year, but with last week's filing, we now know that the first quarter wasn't so comforting on the bottom line. Revenue did soar 136%, but Pandora's net loss more than doubled.

In a move to milk more revenue from its most active users, Pandora limits free access to 40 hours a month. Pandora One is a subscription at a nominal price of $36 a year, offering unlimited commercial-free streams and other premium goodies. Despite Pandora One's success, advertising still accounts for 86% of the company's revenue.

One other point worth addressing is that Pandora won't be bringing in a whole lot of money during the IPO. Some 8.7 million of the shares it's offering come from insiders cashing out. The net proceeds of the 5 million to 7 million freshly minted shares will result in as much as roughly $50 million in net proceeds, but more than half of that will go right out to pay off accrued dividends on convertible preferred shares that are being swapped for common stock.

Choose your weapon
The inevitable comparisons will soon begin to materialize. Pandora is a speedster, but it's not profitable. Sirius XM is in the black, but it grew its top line by a mere 9% in its latest quarter.

If Pandora's offering is priced at $9 a stub, Sirius XM will command a market cap 10 times greater. However, comparing Sirius XM's profitable $724 million in revenue during the first three months of this year to Pandora's profitless $51 million in the same quarter puts things in its proper perspective. Pandora is growing a lot faster, but will it be able to turn the corner?

An IPO doesn't have to be profitable. Groupon is losing gobs of money, but the three-year-old dealmaker will likely command a larger market cap than Sirius XM and Pandora combined.

Pandora won't appear cheap by most measuring sticks, which will ultimately be good for Sirius XM investors. Instead of pitting Sirius XM against sleepy terrestrial radio operators, investors will now have a category of two premium audio content broadcasters on the rise.

That can only help, especially since both companies have unique catalysts that may take their games to even higher levels. Sirius XM is eyeing a rate hike next year, and the next generation of satellite receivers should hit the market later this year. Pandora's just scratching the global surface, and now that smartphones are converging with automotive dashboards, Pandora will become even more popular with drivers.

Sirius XM and Pandora may be rivals in many ways, but when it comes to justifying their lofty valuations, they are joined at the hip.

Are you interested in Pandora's IPO? Share your thoughts in the comment box below.

The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz is a subscriber to Sirius since 2004. He does not own shares in any of the stocks in this article. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance.


Read/Post Comments (8) | Recommend This Article (5)

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  • Report this Comment On June 06, 2011, at 10:53 PM, 67vair wrote:

    Pandora's only content is music, and music that it believes I want to hear based on my preferences. Sirius radio is true radio in the sense that it offers mega content from a major number of channels with huge diversity. No comparison between them. Sirius is far superior, and I will tell you now that Pandoras stock will shoot up out of the gate, and die out in a few weeks, to a bottom level, where it will remain.

  • Report this Comment On June 07, 2011, at 9:48 AM, bottomfisherman wrote:

    Its good news Rick. Pandora will get attention with this release as well as SIRI and people will start to look at it and compare it with SIRI and see that Pandora is very poor and not even close to the quality of SIRI. Pandora bankrupt and for sale for chump change in 2 years.

  • Report this Comment On June 07, 2011, at 10:00 AM, TMFConan wrote:

    I had XM, it wasn't great, I ended up only using it for traffic reports until I just stopped altogether.

    I use Pandora almost every day. It's the best use of personalization that I've ever seen. I believe this will be a primary distribution channel for music in < 2 years.

  • Report this Comment On June 07, 2011, at 10:43 AM, siriuslyrick wrote:

    And, of course, one of the big unknowns is the future of "unlimited" data plans, and of data streaming costs in general. If the rumblings about bandwidth scarcity, the demise of unlimited plans, and large increases to the cost of data plans in general ever hit the mainstream, then Pandora and other streaming-dependent providers will become more scarce than Dodos.

    Pandora's IPO will likely be full of sound and fury (read "hype and frenzy"), then follow some sort of damped harmonic oscillation pattern right to the zero line.

  • Report this Comment On June 07, 2011, at 11:37 AM, SocalChris wrote:

    Pandora's IPO will be great for SIRI in the very near to long term, because it will show just how unprofitable the Pandora business model really is. It's great to have a ton of "registered" users, and Pandora may have it's fans, but as a BUSINESS, it has yet to turn a profit. People can rave about Pandora, and they can love it's service, but that doesn't mean it will make money. It has shown no comprehensive plan for turning a profit, and in fact, I believe they just recently borrowed $30M right before their IPO. Doesn't that sound awfully desperate?

    In order for Pandora to turn a profit, they will have to make some kind of major adjustment to their business model, and they have not proven that any adjustment of this sort will be accepted by it's current or future users.

    When Pandora is forced to report quarterly results, I believe investors will quickly realize that it has no viability as a profitable business. Take a look at their Q1 report and imagine how investors would have reacted to their Q1 loss.

    Shedding light on Pandora's financial results will show by comparison how impressive SIRI's results are.

  • Report this Comment On June 07, 2011, at 8:14 PM, jm31563 wrote:

    Go aead Pandora....get an IPO...and watch SIRI still whip your ****

    Long SIRI!

  • Report this Comment On June 07, 2011, at 10:26 PM, FM5 wrote:

    Come on,,, pandora is over rated as krispy kreme was, when the people get the bill for pandora

    and it's not free any more , you will see a major

    drop

  • Report this Comment On June 10, 2011, at 5:17 PM, artemgoncharuk wrote:

    Pandora may be losing money in the near term, but, in my opinion, in the long term their music service is better. With Sirius XM, you cannot jump to the next song if you do not like what's playing.

    I have Sirius XM in my car and in most cases I prefer to stream Pandora because it provides personalized music.. In fact, if Pandora was build into the sound system, I would not listen to Sirius XM at all.

    Major car manufacturers started integrating with Pandora (e.g. Ford and BMW). This will increase Pandora's revenues and make the model similar to SIRI's (mores dollars coming from the subscription than from ads)

    The only downside that I see so far with Pandora, is the absence of specialty talk radio. With the move to the smarter and connected sound systems in cars, you would be able to get most of the news/talk radio for free anyway.

    The music offering, however, is better on Pandora.

    If there is a choice, whether to pay for SXM or Pandora, I would go with the latter.

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