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Tech analyst says Pandora 'dramatically overvalued'

Rich Greenfield says stock price of Web radio service is too high, though it's down 50 percent from high. There are still too many questions about business model.

Pandora's share price is down 50 percent from its high but is still "dramatically overvalued," says one of the leading Wall Street tech analysts.

The company's stock was trading at just under $13 this morning, down from a high of $26. But Rich Greenfield, an analyst with BTIG Research, writes that "our conviction level in our sell-rated investment thesis has increased."

In a blog post titled "Why we would continue to short Pandora stock--remains dramatically overvalued" Greenfield said the Web's top radio service is worth "at best" $5.50 per share.

Pandora founder Tim Westergren CNET

Pandora enables users to choose their favorite artists and musical genres and based on those choices the company uses an algorithm to determine what music to play. That is the limit on the control Pandora users have on what they hear.

The company offers an ad-supported service that is free of charge to users but limits them to 40 hours of free listening per month. Another service, called Pandora One, costs $36 annually and offers unlimited commercial-free listening. Since most of the users choose the free-of-charge service, advertising is vital to Pandora and lately it seems that the company is selling more of them.

One problem with that is throwing too many ads into the listening experience means Pandora risks alienating users, especially when YouTube and Vevo enable visitors to listen to music free of charge as well as the ability to listen to the same song over and over again, fast forward or reverse, and do so often without being pestered by any ads at all.

Pandora's real problem though is that the business model doesn't appear to scale well. Pandora must pay SoundExchange, the company that collects royalties on behalf of music creators, each time someone listens to a song. The larger Pandora's audience gets, the higher its costs.

In June, a SoundExchange spokeswoman explained Pandora's position this way "Because the rate they pay is based on per-spin, more listeners doesn't make them more profitable. It doesn't solve their problems. They have to make each listener more profitable."