With Pandora in Free Fall, Is Now the Time to Buy?

Source: Pandora Media

Mr. Market has not been kind to Pandora Media (NYSE: P  ) as of late. After reporting improvements in both listener hours, a higher share of the U.S. radio market, and a year-over-year increase in active listeners, shareholders took concern that the business's growth might be slowing. In response to the news, combined with a general decline in the S&P 500, shares of the Internet radio broadcast company contracted 10%. Is it possible that Mr. Market is overreacting to Pandora's news and that it's still alive and well, or could these metrics suggest tougher times ahead for the company?

Is Pandora having growing pains?
For the month of March, Pandora reported that listener hours rose 14% to 1.71 billion from the 1.49 billion management reported the same month a year ago. In addition to a greater hour count, the business saw its market share of the U.S. radio industry rise from 8.05% last year to 9.11% this year. Even in terms of active listeners the company's performance improved, rising 8% from 69.5 million last year to 75.3 million this year.

  March 2014 March 2013
Listener Hours 1.71 billion 1.49 billion
U.S. Radio Market Share 9.11% 8.05%
Active Listeners 75.3 million 69.5 million

Source: Pandora Media

Using this data alone, investors might think the case for investing in Pandora is stronger than ever. With its market share on track to reach 10% within the next year, listener hours approaching 2 billion a month, and its active listener base comprising more than 20% of the U.S. population, there's plenty of positives to buying its shares.

However, investors got caught up on one negative tidbit of news. Compared to February of this year, Pandora's active listener base failed to budge. This gives the impression that, although the company has grown rapidly in the past, it might finally be hitting a wall due to market saturation and/or increased competition. Under either of these circumstances, growing its business would likely prove more challenging and costly moving forward.

Can Pandora survive?
Over the past few years, Pandora has been a terrific growth machine, but the company has been unable to turn a profit. Between 2009 and 2013, for instance, the company saw its revenue rise from a modest $55.2 million to $427.1 million, while its net loss widened from $16.8 million to $38.1 million. The main culprit behind the rise in losses has been the business's cost of revenue and selling, general and administrative expenses, both of which have jump as sales increased.

This problem seems to be unique to Pandora. SiriusXM Radio (NASDAQ: SIRI  ) has not had the same challenges extracting a profit from its growing revenue. Over the same timeframe, SiriusXM saw its revenue jump 52% from $2.5 billion to $3.8 billion as its subscriber base rose from 18.8 million to 25.6 million.

  2013 Revenue 2009 Revenue Change
Pandora Media $427.1 million $55.2 million 674%
SiriusXM Radio $3.8 billion $2.5 billion 52%

Source: Pandora and SiriusXM

From a profitability perspective, SiriusXM's performance has been even better. Between 2009 and 2013, the company reported a significant improvement in its bottom line, with net income soaring from a loss of $352 million to a gain of $377.2 million. Unlike Pandora, SiriusXM benefited from drastically falling costs, mainly in the form of revenue growth that outpaced the rise in the company's cost of revenue and selling, general and administrative expenses.

Source: SiriusXM

Over this timeframe, the company's cost of revenue dropped from 43% of sales to 36.7%, while its selling, general and administrative expenses plummeted from 32.2% of sales to 14.6%. This is far better than Pandora's results, with its cost of revenue rising from 14.3% of sales to 68.1%; this was partially offset by its selling, general, and administrative expenses falling from 43.1% of sales to 36.5%.

  2013 Net Income 2009 Net Income Change
Pandora Media -$38.1 million -$16.8 million -$21.3 million
SiriusXM Radio $377.2 million -$352 million $729.2 million

Source: Pandora and Sirius XM

Foolish takeaway
Based on the evidence provided, it looks like Pandora might indeed be slowing down. Its other metrics stand at an all-time high, however, which suggests that the business has the same number of ears glued to its program for longer hours. This is certainly noteworthy, but the company has something a bit more serious wrong with it.

Currently, management is operating at a net loss and has been doing so for quite some time. This is sustainable so long as the business is growing rapidly, but if the company is beginning to show signs of fatigue then investors will focus more intently on its ability to turn a profit. With competition from other radio companies like SiriusXM that have been turning a profit, this could prove to be a major concern for shareholders going forward.

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  • Report this Comment On April 07, 2014, at 7:15 PM, sirifair6 wrote:

    Daniel,

    The only common thing that sirius and pandora have is that both broadcast music. Regarding the rest, they are oceans apart.

    Both companies have been in business about the same time (although sirius xm is a five year old merger but both of its predecessors, siris and xm became operational one year apart). The only positive metric pandora has is the customer growth. But even with 70M+ customers pandora has failed to make money whereas sirius is generating piles of cash, with fcf at $927.5M in 2013 and guided at whopping $1.1B in 2014.

    The conclusion is that pandora's current business model is profoundly flawed. There are a lot of people who are fascinated with "growth". To me, growth makes sense only if it is moneytized handsomely.

    If pandora cannot make money with 70M+ customers a legitimate question arises,''How many customers does the company need to start making money - 100M, 200M?! This country does not have that many people to satisfy pandora's appetite for customers.

    I believe that the pandora of today is a business into nowhere. This is why I would not buy it even for $3.

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