Investors should approach Pandora IPO cautiously

NEW YORK – Investors eager to rush in on Pandora Media Inc.’s Wednesday stock listing may want to take a moment to figure out how the Internet radio service will make money in the years ahead.

Pandora shares will start trading in the wake of a spate of initial public offerings for Internet companies that have seen soaring valuations.

Oakland, Calif.-based Pandora priced its IPO late Tuesday at $16 a share, above its recently raised range of $10 to $12 a share, giving it a $2.6 billion valuation.

But at least one set of Wall Street analysts are skeptical if the largely advertising-supported Internet radio service can bring in the dollars to justify its price tag.

“It’s not that we think Pandora won’t be profitable; we don’t think that profits will be enough to justify the valuation,” said Richard Greenfield, an analyst at BTIG Equity Research.

Greenfield added that the IPO would be “more compelling” at a range between $4 and $5 a share.

The fear is that as more users start listening to Pandora on mobile devices rather than on traditional computers, the shift from online ads to less lucrative mobile audio ads might eat into advertising revenue. The problem is likely to grow as the number of listeners turning in on mobile devices increases.

The proportion of hours of Pandora music streaming to mobile devices rose to 60 percent last quarter from 4.6 percent in 2009, according to a Pandora filing.

The company said its advertising revenue last year was $119 million, 87 percent of total revenue. The rest came from subscribers who pay a premium for ad-free listening and other perks.

Pandora’s filing disclosed that “we have not been able to generate revenue from our advertising products delivered to mobile devices as effectively as we have for our advertising products served on traditional computers.”

Pandora’s filing noted that audio and video advertising products better suited for mobile devices have not been as widely accepted by advertisers as traditional display ads.

Also a worry: royalty costs are set to rise in the next four years as its number of listeners grow.

One advertising executive acknowledged the drawbacks of mobile advertising.

“Online, Pandora can build a bigger brand experience by, for instance, featuring a banner message that takes over the entire screen,” said Sal Candela, director of mobile strategy for media agency PHD. “There isn’t the opportunity to do that on a Smartphone screen because of limited real estate.”

Candela, who has developed ad campaigns for clients on Pandora, said that mobile ads have their benefits, though — for example they can be tailored to consumers’ locations at a given moment.

But advertisers have only started to embrace mobile platforms as in the past year, said Candela. He added that mobile ad campaigns are harder to implement because the mobile market is cluttered with different devices.