Pandora’s Down Day: Investors’ Remorse? Bubble Fears? Market Negativity?

Rather than outside forces such as volatility on Wall St. or bubble fears, it looks like concerns about Pandora’s uncertain ability to achieve profitability appears to be the most likely cause of the nosedive its stock price took. Shares closed Thursday at $13.26, barely a day after pricing its IPO at $235 million or $16 per share and experiencing a quick rise, peaking at $26 yesterday.

After the previous day’s quick rise, Wall St. observers are asking what happened, with talk of fears of another “internet bubble” or wider market volatility serving as explanations.

But BTIG Research’s Rich Greenfield, who’s been dubious of Pandora’s value from the start (see the video embedded below), initiated coverage with a $5.50 one-year target price.

Greenfield, writing in a research note sent out this afternoon, says, “While we expect Pandora (NYSE: P) to experience dramatic revenue growth from its current fiscal year (January 2012) though fiscal 2015, with revenues increasing from $264 mm to nearly $1.1 bn, we only expect the company to generate $80 mm of EBITDA in fiscal 2015E (compared to a slight EBITDA loss in fiscal 2012E)… Pandora is a great consumer music service, but its business model does not scale in the same way as other successful Internet businesses.”

Pandora pays fixed fees for every song listened to — and those fees rise every year. The company is betting on targeted advertising to eventually cover those expenses. But as Greenfield points out, it is important to remember that Pandora’s advertising will increasingly be audio-only, as listening hours shift to mobile/auto, which suffer from dramatically lower CPMs than display/interactive advertising.

On top of that, Pandora has a royalty problem with the record industry that remains unresolved. The company is still operating without an agreement with ASCAP, a copyright collection agency representing songwriters. The falling-out happened late last year because Pandora considered the royalty rates currently sought by ASCAP too high. ASCAP is one of the three main performing rights organizations, with the other two being BMI and SESAC.

Joe Mullin adds: If things got really dicey for Pandora and copyright royalties prevented any profit at all, I wonder if the music labels down the road could be convinced to ease the pressure a bit in terms of royalty payments. Presumably a world of successful internet radio stations where they get paid something looks more attractive than a world full of failed internet radio stations not giving them any revenue.

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