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Does Pandora’s Lukewarm IPO Foreshadow Groupon’s Fate?

Insight June 30, 2011

After filing for an IPO in Februrary, 2011, streaming music company Pandora went public on June 15, 2011 with little fanfare.  In contrast to LinkedIn which went public last month with a soaring valuation, Pandora’s valuation has been largely as expected.  Off the heels of LinkedIn, this could be seen as disappointing. 

Here is a timeline of Pandora’s valuation:

Early June 2011: $10-12/share; $1.9 billion valuation
June 14, 2011: $16/share; $2.6 billion valuation
June 15, 2011 (first day of trading): opened at $20/share, closed at $17.42/share; $3 billion valuation
June 16, 2011: opened at $16.99/share, closed at $13.26; $2.1 billion valuation

More recently, Pandora has been trading at more than 25% below the opening price. 

What caused this slide? 

Pandora has close to 95 million registered users and 800,000 songs in its online database, yet lost $6.8 million in the first quarter of 2011 despite bringing in $51 million over the same period.  Only since July, 2009 have SoundExchange royalty rates for Internet radio been low enough for streaming sites to conceivably make money, and Pandora hasn’t been able to catch up thus far.  Therefore, it seems likely that this slide is the result of a market correction. 

In other words, Pandora’s lukewarm trading may simply be attributed to a lukewarm company that hasn’t been profitable to date.  Renren is another social media company that has disappointed in its IPO, similarly carrying large debts.     

Groupon filed for an IPO on June 2, 2011.  Like Pandora and Renren, Groupon has underperformed financially despite large user bases.  Groupon has steadily lost money each quarter, including $146.5 million in this year’s first quarter.  Despite the fact that Groupon’s S-1 form has allowed potential investors to further scrutinize Groupon’s business model and financial plans, investors still estimate Groupon’s valuation to be anywhere from $20-30 billion.  For reference, Google’s IPO was worth $25 billion.  Groupon is projected to go public in late August to early September.  It remains to be seen which path Groupon will follow: LinkedIn’s, or Pandora’s.          

31 more technology and Internet companies are estimated to go public by the end of 2011, the most in similar fields since 2000.  Livingsocial just declared for an IPO this week, while Zynga is rumored to be filing for an IPO within the next couple of weeks.