Pandora (P) Analyst Day Will Help Answer Some Questions

Pandora Media (NYSE: P) will be in the spotlight Tuesday as the recent controversial IPO hosts its first analyst day.

After pricing its IPO at $16 on June 15, well above expected $10-$12 range, shares opened at $20 and surged to $26 only to see things dramatically deteriorate. By the next day of trading shares had broken the syndicate price and closed at $13.26. Shares have recovered since, now trading above $19.

The analyst day will give Wall Street a sense on how a company which has raked-up losses of $92.1 million since its inception in 2000 will be able to turn its popular custom Internet radio service into a money-maker.

So far analysts are skeptical. Of 3 independent analysts who have picked up coverage on Pandora, 2 have a rare "Sell" rating on the stock, according to data at StreetInsider.com's Rating Insider.

Analysts from the underwriters, which tend to be more bullish, have yet to pick up coverage of Pandora. These analysts will be free to pick up coverage after the quiet period expires on July 25. Firms which could launch coverage soon on Pandora include Morgan Stanley, JP Morgan, Citi, William Blair, Stifel Nicolaus and Wells Fargo.

The latest analyst to pick up coverage, James Boyle of Gilford Securities, is very skeptical of the company based on key risks and valuation. He rates shares Sell with a $14 price target, suggesting 38% downside from current levels. He gets to his $14 price target based on 5x FY13E Price/Sales, a modest discount to Google’s consensus CY12E P/S. “P is a pricey stock” he contends.

Boyle suggests the company's strong user growth cuts both ways. "Last FY, active users soared 81%, listener hours zoomed 111%, and royalty fees were also up 111%. Cautious investors, impressed by growth, still wonder about margins," he said in his recent report.

He is also cautious on the stock due to competition. He says domestic competitors -- current and projected -- as well as international peers looking to launch in the US, will be gunning for the company.

Pandora's competitor list is long and growing, Boyle notes: Spotify, Slacker, Radio.com, MOG, RDIO, Last.fm, MP3.com, iheartradio, Rhapsody and others online, as well as much larger terrestrial radio station groups, such as Clear Channel (NYSE: CCO) and CBS Radio, in addition to Sirius XM (Nasdaq: SIRI) satellite radio. Specifically on Spotify, he notes the very popular European service is said to be considering an USA launch soon, and it might try to partner with Facebook. Another indirect competitor is Apple's (Nasdaq: AAPL) iTunes.

Maxim Group's John Tinker, who rates shares a Buy, is looking beyond the royalty fee concerns and competition to the ad dollars at stake. With 94,000,000 registered accounts, 34,000,000 active users and a key young adult demo, Pandora is in a great position to capture a large chunk of this market, he said.

Tomorrow’s analyst day is sure to answer some questions, but many more will remain. The event will take place at 8AM PST on Tuesday, July 12, 2011, in San Francisco. It is invite only, but all can listen to the event live at http://investor.pandora.com

Although very volatile, Pandora shares are currently up 1.4 percent to $19.53.

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