Modeling Pandora: The Money Doesn’t Stream Like the Music

Want to learn financial modeling? You’re in luck.

The truth is that modeling is easy – but the most efficient way to learn is to play with someone else’s model, and then build your own from scratch. And finding another model can be tough, since they are usually build for proprietary business reasons.

In FBE 421: Financial Analysis & Valuation, our final project was a full-blown valuation of Pandora Radio, including a discounted cash flow model. If you would like to take a look, I’ve included links to both our final report and the supporting model below… as well as our colorful cover slide to get you excited :)

Pandora Title Slide

Pandora Valuation Report (PDF)
Pandora Valuation Model (Excel)

We were tasked with analyzing Pandora on behalf of a fictional private equity firm. Should the firm take a controlling stake, a non-controlling stake, or no stake at all? If the firm invested, what would the Pandora’s ongoing strategy be?

As you can guess from our title, we recommended not investing in Pandora. Pandora is the leader of an unattractive industry. Yes, it dominates internet radio and yes, Pandora has an expansive user base and valuable brand – but the industry faces extreme competition (from Spotify, terrestrial radio, and major media companies like Google, Yahoo!, and Apple) and enormous risk in government regulation (internet broadcasters have to pay enormous content acquisition costs for every song streamed). From a private equity perspective, there are limited exit opportunities considering that likely acquirors (major media companies) generally already own internet radio assets. Of course, there’s also the fact that Pandora is a growth company with no cash flow, which eliminates the standard PE strategy of adding debt. (For more, see the report.)

The model allowed us to quantify the qualitative assessment stated above. How difficult is profitability when content acquisition costs take 60% of revenue? We had to make some aggressive assumptions about operational improvements in order to get Pandora cash flow positive within a reasonable period. Additionally, even with those dramatic improvements, our DCF gave us a target price that was only slightly higher than Pandora’s current market price. Considering the significant premium that any purchaser would pay for a growth company like Pandora, there was no space for returns to the private equity firm.

Hopefully, playing with the financial model is fun. This model is very different from the models I built during my investment banking summer internships – it’s more like the models I build for case competitions with Marshall Case Team – but nevertheless, it will give you an idea of what “financial modeling” really means.

Lastly, sincere thanks to Professor Julia Plotts as well as my group members – Damir Becirovic, Greg Bumstead, Arjun Chaurushia, & Priscilla Lee, for a phenomenal semester in FBE 421: Financial Analysis & Valuation.

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