Radio Investments: Is This Stock Now a Buy?

Pandora (NYSE: P  ) trading significantly lower after posting its FQ2 earnings report back in August and has only recovered slightly since. While the stock has doubled in 2013, and expectations were high, is the loss warranted, and is Pandora a post-earnings buy?

What was in the quarter?
I've never been too high on Pandora, but as I gazed upon their numbers and read the quarterly report, I couldn't help but to like their direction.

First off, revenue grew 58% year over year to $162 million and they posted an EPS of $0.04, both beating expectations. However, the weakness in shares was due to EPS guidance that was slightly below the consensus, and their decision to remove a 40-hour monthly mobile listening cap for free listeners.

Aside from top and bottom line performance, I found Pandora's content acquisition cost and its RPM to be very impressive.

The content acquisition cost is self-explanatory, showing how much Pandora pays for its content. In the quarter, it rose just 35% year-over-year. Back in FQ4 (two quarters ago) content costs were rising at 75% year-over-year. The 35% increase is a huge move in the right direction. Moreover, Pandora's content is its highest overall cost, and I find it encouraging that revenue is outperforming this one cost.

RPM is the amount of ad revenue that Pandora creates per 1,000 hours of listening. Back in FQ1, the RPM was $25.31 for mobile, which was up 34% year-over-year. But for the most recent quarter, RPM jumped to $33.9, a significant acceleration, and a 53% rise over the previous year. This shows that Pandora is earning more money for its services.

While these facts are all encouraging, there's another reason that I like the direction of Pandora.

What's to like?
As Pandora moves into vehicles, the comparison of it and Sirius XM (NASDAQ: SIRI  ) becomes more legit.

Back in June, Pandora disclosed that its services were in 2.5 million cars, more than 100 models. According to Bloomberg, the local radio advertising market is valued at $15 billion annually, which is a space that Pandora had no presence in years prior.

Pandora's 2.5 million car users is a long way from reaching Sirius XM's 25 million subscribers. However, Sirius has been the sole player in this space, but now faces the competition of Pandora, and we could find that Pandora steals significant share.

This brings me to my next point, with full-year revenue guidance of just $650 million, Pandora is still relatively small considering the size of its mobile, PC, and now auto market. On the other hand, Sirius has continued to grow as U.S. auto sales have exploded during the last four years. Yet, its year-over-year revenue growth is just 12% (last quarter), far below that of Pandora.

Despite Pandora growing five times faster than Sirius, Pandora trades at 7 times sales and Sirius has a price/sales of 6.3. Therefore, both are valued similarly, although Sirius is highly profitable and Pandora is not. However, Pandora is entering a multi-billion dollar industry while Sirius faces a new competitor in its space. Hence, I believe that Pandora presents the better value and is cheaper relative to growth.

What about that other guy?
In addition to Pandora and Sirius, there's this other company by the name of Apple (NASDAQ: AAPL  ) who's entering the radio space.

Apple's operating system will be included in (many) vehicles, as will a radio service similar to Pandora. While Apple's new services will be available on iOS and PCs, Pandora still has iOS, BlackBerry, Android, and Windows Mobile. Not to mention, Pandora has a large sales team that focuses solely on local advertising.

Apple is not an advertising company, as its Internet radio services are more about strengthening the company's ecosystem – creating iTune purchases and attracting new iOS users -- versus finding advertisers. In the end, Apple's bread and butter is hardware, and offering products that stand out against Android.

At 12.5 times earnings, I think Apple is an attractive investment opportunity, but not based on the potential of iRadio, and I think this fact is important to remember. Therefore, I don't think Apple's presence greatly affects Pandora, especially considering Pandora's limited presence in vehicles. At this point, Pandora has a large market to gain, and not much to lose in the vehicle market.

With that said, Apple could affect Sirius, as this marks a second major competitor along with Pandora. The difference between Pandora and Sirius is that Sirius has the most to lose with 25 million subscribers, being the current vehicle-based radio leader. In the past, it has been quite easy for Sirius to thrive: They had no real competition.

Final thoughts
Personally, I am impressed with Pandora's quarter, and I think the company's entrance into vehicles is an unspoken catalyst that gets little coverage.

Now, I won't go as far to say that Pandora will stand the test of time, and be relevant in the next decade. However, with current growth, and with its valuation relative to Sirius XM, I think there's a lot to like.

Perhaps, its post-earnings weakness is an opportunity, or maybe it falls lower after Apple launches it service. Either way, I'd keep my eye on this stock for gains over the next year, as further vehicle penetration is observed. 

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  • Report this Comment On September 11, 2013, at 8:23 AM, 67vair wrote:

    And once again, Pandora has never made a profit and is overvalued. Not a buy at any price.

  • Report this Comment On September 12, 2013, at 2:30 AM, Scottgisme1 wrote:

    And not only has P never earned a profit, they are further threatened by increasing music royalty fees. They are also limited to cell tower connectivity for service, which SIRI doesn't have to worry about. Finally, and most importantly, P is solely in the music business and will never be able to compete in the content arena. As SIRI chips away at their float over time, price will have to increase more dramatically. # of shares out x share price equals market cap. In this case 6.3bil x $3.87 per share = $23-24 bil market cap. If the float, over the next 5 years, is reduced to 3 bil and market cap remained the same, all other things held constant, would give SIRI an $8 pps. I suspect that, by the time that the float was reduced to half of the current float, based on current subscriber growth, SIRI would have a market cap closer to $30-35 bil. That would translate to $10-12 pps. This is the future... 5 years down the road, so long as SIRI's fundamental story remains the same. Malone only has approx. 3% of his shares that he could sell and maintain control, so the big question is.... will Malone maintain majority control at 50% of outstanding shares or will be relinquish control? For now, he ain't selling. So long as he's holding... Over half the float is tied up by Malone and at some point, along with buy backs by SIRI, we get into a supply squeeze for SIRI shares. A major announcement, at just the right time here, could prove to be explosive to SIRI pps. I believe that such an event is what Malone is setting up, at the right time, to create a huge profit for himself. He is a master of wealth creation and that's what I think Malone will execute over time. So long as Malone maintains majority control of SIRI... I'm not selling.

  • Report this Comment On September 12, 2013, at 2:41 AM, Scottgisme1 wrote:

    I should add that, the longer SIRI remains at a lower price, the more effective the buy back programs are. I would think that if Malone was in it for the long run, he would like to see the float come down enough to make a major announcement in the future, cause a big run in share price. If he holds majority control through these cable mergers... one could clearly see that Malone is holding out for much bigger profits. Win sooner or win later.... still a win / win situation for longs. Good luck to all and God speed to SIRI!

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