Is Pandora Really Worth $22 a Share?

Pandora’s (NYSE:P) IPO opened this morning as a flood of investors jumped on the internet radio company’s bandwagon, pushing stock prices up 25% in trading earlier today. The stock opened at $16 per share and is now trading at over $20. The startup looks poised to make me eat my words as I opined several days ago that the company would not carry shareholders to significant short term returns from its IPO.

Having burst out of the gates this morning, can Pandora (NYSE:P) sustain its current momentum, or is it headed for a reality check when IPO fever subsides?

Henry Blodget of Business Insider offered his opinion on the company’s future, commenting succinctly, “So is the stock now absurdly overvalued… not necessarily. (But probably).”

Blodget continues, “On the bull side, think about it this way: Pandora should be a major beneficiary of the future of global music radio. Unlike terrestrial radio stations, Pandora has no distance or frequency constraints… And that means it could eventually be more valuable than most of today’s music radio stations put together…Of course, that doesn’t make Pandora “worth” $4 billion today. There are dozens of things that could go wrong over the next several years.” Tempering initial optimism, he concludes, “For what it’s worth, our own conclusion is that, at this level, the stock isn’t worth the risk.”

The chief criticism from analysts and lay-commentators regarding Pandora (NYSE:P) is that it will struggle to become profitable. The company has posted net losses of $25 million dollars in the past two years despite boasting a rapidly growing user-base (already 90 million registered users) and more than 50% of market share in Internet Radio. Pandora faces still fixed costs from royalty fees via the music industry that have eaten into revenues thus far, and are only expected to increase in the coming years.

Trefis.com projects that Pandora’s major revenue growth will come from three sources, subscription fees, mobile advertising, and online advertising, with a potential to take a 15% stake of the $10 billion dollar online market by 2014. However, Trefis concludes that the company’s current price level is unsustainable, and predicts a regression to a price range closer to $10 in the near future.

As of 12:15 PM, I have yet to come across one financial analyst, writer, or opinionated arm-chair commentator who believes that the company is worth what its currently trading at. Not that any of that group expected LinkedIn (NYSE:LNKD) to reach current price levels, but in the case of Pandora, its a box of trouble that might be best avoided.