If Pandora is any indication, the recent Groupon stock offering has unleashed a wave of enthusiasm about the technology IPO market: The social music-filtering service has just boosted the price on its own initial public offering, which is expected next week. The company was planning to offer shares at $7 to $9 each, but it is now expected to offer them at between $10 and $12, which would give it a market value of $2 billion after the IPO. But is the rising tide of enthusiasm for Pandora one that will lift all boats, or one that threatens to swamp them instead?
That a company like Pandora might want to take advantage of the growing desire for technology stock offerings is hardly surprising. As we’ve written before, there has been so much pent-up demand for tech IPOs over the past several years that there was bound to be a rush when the dam finally broke with LinkedIn’s share issue. The increasing private-market valuations of companies such as Facebook and Twitter — both of which have managed to avoid the public markets while still raising billions of dollars from private investors — have only added fuel to that fire.
Groupon has been criticized, both before and after its initial offering, for being what some have called a “Ponzi scheme,” in which the company has to spend more and more money just to keep its revenues growing — something critics such as David Heinemeier Hansson of 37signals have argued is a fundamentally unsustainable business model. And Pandora has had its share of critics as well, for similar reasons.
While the music-filtering service has seen dramatic growth in revenues and number of subscribers over the past year, it has also seen a similarly sharp increase in costs — since it has to pay licensing fees to the major record labels for the content it streams. The more music streamed, the higher the costs. In the first quarter of this year, revenue climbed by more than 135 percent and the number of users rose by 77 percent, but the company’s losses also ballooned by 124 percent compared with a year earlier.
One prominent analyst issued a recent note to investors advising them not to participate in the Pandora offering at the new higher price. Richard Greenfield of BTIG warned that while the service has become a big hit with consumers, and the rapid growth of revenues over the past year or so makes it appear attractive, the corresponding rise in costs makes the company’s business less appealing than the proposed stock price would suggest. Greenfield stated:
Put simply, the revenue/earnings leverage from growing users/usage is simply not enough to scale earnings relative to the IPO?s proposed valuation.
Greenfield’s projections have Pandora becoming cash-flow positive sometime in 2014 if its business continues to evolve along the lines that he expects. Groupon, meanwhile, may not ever become profitable — even in an operating sense — according to some of the analysis of the company’s balance sheet. And yet, investors seem willing to pay the equivalent of $30 billion or so for the company’s shares.
Are these signs of a bubble? Not everyone is convinced. Marc Andreessen of the investment fund Andreessen Horowitz — which has arguably helped contribute to such fears by investing large sums in companies like Groupon and Twitter — said recently that he doesn’t think there is a bubble, but he’s happy others think so, because that means there’s less competition for him when it comes to investments. Others argue there isn’t a true bubble until average investors are borrowing money to buy tech stocks.
To skeptics, however, the prices being assigned to Groupon and Pandora seem fairly bubble-like, as does the increasing inflation of those values due to demand. Whether this turns into a full-fledged bubble remains to be seen — but if hotly anticipated share issues by money-losing companies is on your personal check-list of bubble phenomena, you can definitely check that one off and move on to the next one.
Here’s a video interview that Om did with Pandora founder Tim Westergren in November: