The Holy Grail for an Internet start-up is to have rapid growth with profitability. This involves a company growing subscribers followed by monetization. It's rare that we have a view into these metrics (other than on a quarterly review), but occasionally a highly organized and well-managed company will offer monthly updates. Pandora Media (P) is one of these companies.
Unfortunately, the numbers being reported indicate that increasing competition is hurting Pandora's profitability. Can Pandora get itself back on track before Apple (AAPL 0.42%) and Google (GOOG 1.15%) eat its lunch?
I'd also like to disclose that I am a paying Pandora customer, enjoy the service, and I hope the company thrives. But as an analyst, I'm concerned that the monthly data continues to indicate Pandora may never produce a profit.
Cheaper doesn't mean buy
On April 10, I wrote an article entitled "Pandora's Make or Break Quarter," which highlighted the increasing risks of the stock when it was trading at $29.50. Even though it has pulled back to $23.40, I don't see how long term investors can take the plunge and buy shares without a clear path to profitability.
On May 6, the company announced its listener hours and number of Active Listeners for the month of March here. Year over year, the numbers look great. Active listeners grew by 8% and listener hours grew by 30%. However, when you compare April with March, the comparison is very poor. Growth only amounts to a 1% increase in listeners and a decline in listening hours.
Tough comps on the horizon
If the listeners and listening hours stay at this level, comparisons will begin to flatten out in August, and hit a wall in December. If this happens, and the company is not producing a profit to support the share price, the stock price could drop dramatically. There is no P/E multiple for an unprofitable company and if investors begin to believe they will never see profits, there could be a massive sell off.
Monthly updates are stopping
For a story stock, shares drop when growth slows. We had monthly numbers through last year, but Pandora will stop publishing monthly updates after June, most likely because increasing competition is increasing the variability of results. You can't blame management for that, nobody wants to publish numbers that will make their lives more difficult. But it is important for you to realize that a tipping point may be on the horizon.
Competition heating up
Apple and Google have been late to the online streaming music world, but are making up for lost time. Apple's iTunes radio was launched on Sept 18, but the level of the competition has been difficult to gauge. Pandora's monthly numbers do not indicate a substantial impact from the new competitor but the Beats acquisition could act as a differentiator depending on how it's offered.
Apple has become aggressive in trying to take share by sponsoring live music events such as a Maroon 5 concert on June 20. Apple is also expanding beyond the U.S. with a launch last February into Australia and New Zealand, Pandora's only international market.
Google announced Google Play All Access in May 2013, and it is starting to expand internationally. In the last few weeks, Google Play launched in Canada. Google is trying to customize the service to local tastes by a selection of Francophone music and a playlist that showcases this year's Juno Award winners. Its service is more like Spotify than Pandora since subscribers get access to over 20 million songs for $9.99 per month, which also sets the service apart from Apple's iTunes radio.
Pandora is carrying a knife to a gun fight
Pandora is competing with two considerably better funded companies that view the music streaming business as strategic. If the monthly metrics don't improve when Pandora publishes the numbers for May, it could encourage professional investors to sell before comparisons become more difficult.