We have a long way to go before another bubble in Internet stocks emerges but the recent IPO of LinkedIn (LNKD) and today’s debut of Pandora (P) serve as reminders of what the late 1990’s brought us. Back when Yahoo! (YHOO) was worth more than Disney (DIS) and AOL (AOL) was worth more than (and bought) Time Warner (TWX) there were plenty of bullish pundits arguing why the dot-com versions were indeed worth more because they had far more growth opportunities. While plenty of Internet companies proved to be worth those sky-high valuations, many more did not, including the aforementioned duo.
This morning Internet radio sensation Pandora has seen its stock jump nearly 50% from an IPO price of $16 per share. As a result, Wall Street is valuing the company at a stunning $3.75 billion despite revenue estimates for 2011 of only about $250 million (and more importantly, no profits). How does that compare with some non-dot-com radio competitors? Both Cumulus Media (CMLS) and Sirius XM Radio (SIRI) are valued at about 3 times revenues (including net debt). Cumulus, the more traditional radio play, has about the same annual revenue as Pandora (but has positive cash flow) and carries an enterprise value of around $700 million, approximately 80% less than Pandora.
Sirius XM may be the more relevant comp given that just a few short years ago they were considered the new age upstart in the radio business (and they adopted theÂ subscriber model that many believe holds the key to Pandora’s future success). Sirius XM does have a public market enterprise value of $10.4 billion, three times that of Pandora, but with that comes annual revenue of $3 billion (12 times more than Pandora) and over $800 million in annual operating cash flow. Put another way, Sirius’s operating profits trumps Pandora’ operating revenue by a factor of three.
As was the case back in the late 1990’s, some of these new Internet companies will grow into their valuations and not leave early public market buyers hanging out to dry. That said, nearly $4 billion for Pandora seems more excessive than even LinkedIn, which is currently valued at $7 billion. I would not buy either one at current prices, but given their addressable markets, business models, and competitive landscapes, LinkedIn seems to have more relative promise at current valuations. Time will tell.
Full Disclosure: No positions at the time of writing, but positions may change at any time