Pandora Now Trades On Hope

by Ryan Cole, Investment U Research

Tuesday, June 21, 2011
After Pandora’s strong opening IPO, the company quickly came back to earth. As of this writing,  the stock has dropped well below its IPO price of $16.
Investors are wary of the company’s long-term prospects. Right now, Pandora (P) pays more in royalties on every song it plays than it brings in with advertising revenue. The more songs users listen to, the greater the loss.
Take a look – last quarter brought in $51 million in sales, it’s best performance ever – more than twice what it made a year ago ($22 million). The company also lost $6.8 million on those sales – more than twice what it lost a year ago ($3 million).
All told, Pandora has lost $92.1 million since its founding and has never made money, with no end in sight to that trend. Pandora’s own filing says there’s no possibility of profits before 2013 at the earliest – and no reason to think that 2013 will be any better than this year.
In fact, the odds are stacked against it…
Declining Growth, Shifting Listening and Big Competition
More and more of Pandora’s music is being listened to on mobile devices – and, while the royalties paid remain the same, ad revenue dips for mobile listening.
Those royalties, meanwhile, can’t be renegotiated until 2015 – and at that point, there’s little reason to believe music companies will lower their fees.
Worse – Pandora’s sales growth is slowing, thanks to the aforementioned shift to listening on smartphones and tablets.

  • At the same time, competition is heating up. While no other listening experience offers Pandora’s personalized music stations – which are a tremendous way for listeners to find new music – there are a number of viable alternatives.
  • Internet radio stations are popping up all over the place – and it isn’t very hard to find terrestrial radio stations online either.
  • Cloud services from Amazon, Google, and Apple all are offering streaming music of one sort or another – whether it’s your own music available from anywhere, or a huge database available for rent.

However, this isn’t to say that Pandora will never be profitable…
Pandora’s Long-Term Possibilities, Short-Term Confusion
Pandora has a unique business and customers universally love the service. Those things will often lead to profits, in the long run.
But it may take a good bit of time getting there. As Pandora’s service grows – and the company is adding a listener a second – the company may be able to demand more from its advertisers.
But maybe not – much depends on how effective those ads are. It’s quite possible that advertising revenue will never pay the bills. Perhaps a subscription service is in Pandora’s future – though whether its hordes of customers will follow remains to be seen.
Maybe some other business model will be the one that wins out. And maybe Pandora won’t survive long enough to find the correct balance, or will find its unique delivery system oft-copied, and sink under a flurry of competition. The future is murky.
Pandora is surrounded by a number of questions. Proceed with caution.
Good investing,
Ryan Cole