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IPO Groove: CDNow Croons For Wall Street

If Amazon.com had gone into music rather than books (as it originally had considered), it just might have ended up like CDNow, which plans to take its tune to Wall Street with an initial public offering that may come as soon as next month.

While CDNow (proposed ticker symbol:CDNW) isn't the first to ply the public markets for a song, that honor belongs to N2K (NASDAQ:NTKI). CDNow's revenue is substantially more than N2K's, and its revenue multiple looks to be substantially less.

Said another way, our analysis indicates CDNow may be coming public at about a 75% discount to N2K (see table below). Granted, N2K has inked some key deals with companies like MTV, WebTV, @Home, and Virgin, which have caused its shares to ride up and won the charts since its IPO last year.

CDNow counters with deals with more Web-centric firms Yahoo!, Excite, and GeoCities, betting on traffic in the medium itself. So far it's worked, CDNow boasts of 296,000 aggregate customers since its founding in 1994.

Average daily visits to the CDNow store (CDNow.com) grew from 12,000 in January 1996 to 132,000 in December 1997. Net sales grew to $17.4 million in 1997 vs. $6.3 million in 1996 with repeat customers accounting for over 50% of sales last year. Helping fuel CDNow reach are some 10,000 small Web sites, often music fans, that feature links to it on the Web.

Side-by-side revenue comparison brings out the disharmony in valuation. CDNow 1997 revenue: $17.37 million. N2K runs about half that. Here's our spin on it.

CDNow IPO Liner Notes

CDNow  
Pro forma IPO valuation estimates CDNW
   
Offering 3.60
Greenshoe 0.35
Total offer 3.95
IPO target share price $ 13.00
IPO gross proceeds $ 46.80
   
Shares out pro forma 15.04
Plus warrants @ $2.99 wtd. avg. 0.72
Plus options @ $4.99 wtd. avg. 0.37
Plus incentive stock options 1.19
Fully-diluted shares 17.31
IPO market cap fully-diluted $ 225.06
Plus long-term debt 0.96
Less working capital $ 44.56
Less warrant inflow $ 3.65
= Enterprise value $ 176.85
   
Revenue  
1997 revenue $17.37
1997 growth vs. 1996 176%
Projected 1998 revenue $38.00
Loss  
1997 -$10.75
Primary share loss -$0.91
   
Revenue multiple  
97 enterprise value/annual revenue 10
98 enterprise value/annual revenue 5
Vs. peer N2K (NASDAQ:NTKI)  
Est. NTKI revenue multiple 19
© 1998 Mecklermedia. Internet.com  
all figures in million except multiples & share price

Internet.com forecasts that music sales via the Internet could be as much as 10% of total sales in a $50 billion global music industry (about a third of that is U.S.) by the year 2004. If so, that implies more than $5 billion in potential Web-based music sales up for grabs.

While the modem speed to download these long files just isn't in synch with the music commerce potential, we think some day buying and selling music and burning the entire CD and videos onto recordable media (CD-R or new platforms) may be commonplace. In fact, your PC may be a virtual point of purchase for any and everything media.

At this nascent juncture, however, whether or not CDNow or N2K will be in the mix for that bonanza is unclear. There's a handful of record companies that control the entire industry. If each of them goes directly on the Web, then where will that leave resellers?

CDNow suffered a $10.7 million loss last year, more than 5x what it lost in 1996. Sales and marketing will likely eat up more capital in 1998 and 1999 as the company seeks to be heard above the noise of more than 100 Web-based music retailers vying for volume amid the noise.

Gold? Platinum? Flash in the pan? One hit wonder? CDNow seems to have the market lead, an IPO may keep it on the hot list.