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Will Sirius XM Put Pandora Out of Its Misery?

By Rick Munarriz - Nov 3, 2017 at 11:39AM

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Pandora hits an all-time low after another disappointing quarterly report, but minority stakeholder Sirius XM could hold the key to turning things around.

Pandora (P) and Sirius XM Radio (SIRI 0.00%) seem to be at opposite ends in the eyes of market favor. Shares of Sirius XM hit an 11-year high this summer. Pandora, on the other hand, is hitting all-time lows on Friday after another disappointing quarterly report. 

The irony here is that we're just five months removed from the moment when Sirius XM struck a deal for a minority stake in Pandora. The satellite radio giant made a push to buy all of Pandora last year, only to be rebuffed. It ultimately settled for a convertible preferred stock investment that translates into a 19% piece of Pandora's current outstanding shares or a 16% stake on an as-converted basis. It doesn't have to end there. These two companies are passing ships, but it's never too late for Sirius XM to hook on to Pandora and give it a tow in the right direction. 

Pandora app on a car dashboard.

Image source: Pandora.

Boxing Pandora

Pandora's third quarter was a mess. Revenue rose a lower than expected 8% to $378.6 million, as a 50% surge in subscription revenue was held back by a mere 1% increase in advertising revenue. Pandora is commanding more money per ad spot, but it's serving up fewer commercials to a thinning audience.

Sirius XM may feel as if it dodged a bullet last year. The premium radio darling reportedly offered $15 a share to buy Pandora. The stock has fallen to the point where it's closing in on a third of that price. However, one can also argue that it overpaid for its minority stake in June, even if it's an interest-bearing convertible position. Sooner or later, both parties are going to realize that it will be less embarrassing and strategically more enticing if Sirius XM would sweep Pandora out of public view. Pandora has never been more desperate and with its stock as low as it is right now. Isn't it time to revisit those botched nuptials? 

Pandora's going the wrong way, but it's fading out slowly. It still delivered 5.15 billion hours of content to 73.7 million active listeners during the quarter. Sure, Pandora was serving up more tunes to slightly more people a year ago, but it's still a sizable audience showing healthy signs of engagement. 

Sirius XM and Pandora fit one another's shortcomings perfectly. Pandora's struggling to grow and remain consistently profitable, something that Sirius XM has excelled at on both fronts. Pandora can't get its freeloaders to pay up. There may now be 5.19 million paid subscribers at Pandora, but that's just 7% of its user base. 

Sirius XM is naturally faring considerably better, but it's not without weaknesses that Pandora could help resolve. Sirius XM has struggled outside of the automotive dashboard. Satellite radio is a popular platform for drivers, but getting non-drivers to pay up for its stand-alone streaming app has proven more challenging. Pandora offers access to the hard-to-reach millennials that don't spend enough time behind the wheel to justify a satellite radio subscription. Pandora would also arm Sirius XM's effective ad-selling team with new digital outlets for marketers to reach more people. 

Pandora's guidance suggests that things won't be getting better anytime soon. At least three analysts are downgrading Pandora on Friday. One can argue that Sirius XM can wait -- and that Pandora will only get cheaper -- but that's not the right approach anymore. Sirius XM was right to wait last summer, but it can't afford for Pandora's fundamentals to erode to the point where the audience is no longer material and the platform no longer relevant to milk with obvious synergies. It's time to be opportunistic and save Pandora for selfish reasons.

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