After Crashing, is Pandora Media, Inc. a Screaming Buy?

Source: Pandora Media

After reporting earnings and revenue for the first quarter of its 2014 fiscal year, shares of Pandora Media (NYSE: P  ) fell 16% on April 25. With the company's shares now falling hard after posting better-than-anticipated revenue and earnings that fell in line with analyst estimates, is Pandora a strong buy or should investors consider taking a stake in Sirius XM Holdings (NASDAQ: SIRI  ) instead?

Pandora had a blowout quarter!
For the quarter, Pandora reported revenue of $194.3 million. In addition to beating the $175 million analysts hoped to see, the company's revenue was 69% higher than the $115.1 million the company reported the same quarter last year. In its earnings release, the business attributed the jump in revenue to an 8% rise in active users, which rose from 69.5 million to 75.3 million, as well as a 45% increase in advertising revenue, which jumped from $96.7 million to $140.6 million.

  Forecasted Actual Last Year's
Revenue $194.3 million $175 million $115.1 million
EPS -$0.14 -$0.14 -$0.22

Source: Pandora Media and Yahoo! Finance

From a revenue perspective, it looks like Pandora's a home run. Unfortunately, however, the company's higher sales did not convert into a profit. For the quarter, the company reported earnings per share of -$0.14. Although this fell in line with what Mr. Market expected, it represented only a modest improvement from the -$0.22 the business reported in the first quarter of 2013.

In addition to benefiting from increased revenue, Pandora's losses were trimmed by the business's content acquisition costs declining from 74.5% of sales to 55.7%. Another contributor to the company's slightly better losses was its selling and marketing expenses, which fell from 33% of sales to 31.8% and the spreading out of its losses across an added 16% of shares compared to the same period a year earlier.

Can Pandora get Sirius?
Over the past four years, Pandora has been a true engine for growth. Between 2010 and 2013, the company reported that revenue soared 336% from $137.8 million to $600.2 million. This jump in revenue can be chalked up to, for the most part, a 376% rise in active users from 16 million to 76.2 million.

P Revenue (Annual) Chart

P Revenue (Annual) data by YCharts

In contrast, rival Sirius only saw its revenue jump 35% from $2.8 billion to $3.8 billion. While this is still an impressive display of growth, it's a fraction of the revenue performance demonstrated by Pandora. In its annual reports, the company shows that its subscriber base, which jumped 27% from 20.2 million to 25.6 million, had a large role to play in its growth.

Looking at revenue, it might be easy to draw a conclusion that Pandora is a vastly superior enterprise, but when we assess each company's profits, it turns out this couldn't be further from the truth. Over the past four years, Pandora actually saw its net loss of $11 million widen significantly to $27 million. Meanwhile, Sirius reported that its net income rose a whopping 776% from $43.1 million to $377.2 million. Unlike Pandora, Sirius was able to decrease costs significantly in relation to its rise in sales.

P Net Income (Annual) Chart

P Net Income (Annual) data by YCharts

Foolish takeaway
Based on the data provided, it's clear that Pandora had a strong quarter compared to the results investors wanted to see. In spite of this, Mr. Market doesn't look to be happy with the business and is starting to get impatient about Pandora's inability to generate a profit. Moving forward, it will be interesting to see how things progress with both companies. If management can get the company to earn a profit, it's likely that investors will be handsomely rewarded, but for the Foolish investor who sees this as unlikely, Sirius might make for a more sensible purchase.

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Daniel Jones

Dan is a Select Freelance writer for The Motley Fool. He focuses primarily on the Consumer Goods sector but also likes to dive in on interesting topics involving energy, industrials, and macroeconomics!

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Related Tickers

8/28/2015 4:03 PM
P $18.10 Up +0.61 +3.49%
Pandora Media CAPS Rating: *
SIRI $3.83 Up +0.04 +1.06%
Sirius XM Radio CAPS Rating: ***