Thursday, June 16, 2011

Buy long or sell short Pandora analysis

Pandora Opens At $20 Per Share With A Market Cap Of $3.2 Billion

Here are their economics at a glance as detemined in my simple spreadsheet found in this google sheet.

Their fixed costs other than bandwidth and licensing music are about $20 million per year. Their band width costs are about $0.01 per hour streamed. Licensing costs are about 2/3 of a cent per hour. The average user listens for about 40 hours per year.  If users would pay $0.10 per hour then Pandora would likely earn about $200 million based on current usage, which is increasing.  I love the service and paying that amount would not reduce my use but might that of others.  Many of their hours might be from high volume users who pay $36 per year, meaning that there are fewer hours to charge the $0.10.  My conclusion is that the $4 billion valuation is high based on current revenue, but not unattainable.  What is the cost of creating a copy cat?  What would motivate switching.  Stations are customized over time, creating weak lock in.  I would rather own Pandora than Groupon shares.

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