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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.
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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