Pandora Media (NYSE:P) investors were singing an upbeat tune late last week after a rumor that Jay Z was interested in snapping up the streaming music leader started making the rounds. It failed to materialize, and the stock naturally gave back most of those speculative gains.
The deal never made sense. Jay Z was in the process of finalizing a $56.2 million bid for Swedish streaming specialist and WiMP parent Aspiro. Was he really going to take another bite of digital music so quickly?
There's also the matter of price. Pandora commands an enterprise value of nearly $3 billion, according to S&P Capital IQ data. How much of a buyout premium above that would it take to get the deal done? Jay Z's rich, but that would seem to be too rich even for the music industry icon's blood.
This doesn't mean that someone won't put shareholders out of their misery and buy Pandora one day. As long as it remains the niche leader, it will continue to be a magnet for takeover fodder.
However, the real buyer will likely come from the ranks of the big-tech shakers that are angling to have a larger presence in digital music, and actually have billions collecting cobwebs on their balance sheets. The key for them will be not to overpay for Pandora, and after seeing the stock shed roughly 60% of its value since peaking 12 months ago, it only validates the axiom that patience pays off.
Cracking open Pandora's box
Pandora's stock may have hit a fresh 52-week low last week, but in some ways, it's as popular as ever. It kicked off 2015 with a record 81.5 million active listeners. Pandora also established a new peak in single-day usage this past holiday season when more than 30 million of its users checked into the app on Christmas Eve.
The two things that have been holding Pandora back are its decelerating growth, and the challenge to smoke out premium users. Its base of active listeners is large, but it moved just 7% higher through 2014. Actual usage has spiked 15% -- folks are leaning on Pandora more to score their daily soundtracks -- but we're still talking about an audience that would rather put up with ads than pay Pandora a dime. Less than 5% of Pandora's active listeners pay for premium ad-free access.
Pandora's hoping to change that with a new single-day pass that will be rolling out later this year, something that could come in handy for folks who would rather pay $0.99 to stream ad-free holiday tunes on Christmas Eve than put invited guests through ad blocks. It's a smart move, but we've seen Pandora try and fail before in converting freeloaders into premium subscribers.
It probably didn't help that Pandora boosted its Pandora One subscription rate last May; but it's not as if paying $4.99 a month is going to be a roadblock when $3.99 a month wasn't doing the trick.
Analysts are more upbeat about Pandora's prospects than the stock chart seems to suggest. Wall Street sees revenue climbing 28% this year, mostly on improving ad monetization than usage growth.
Analysts have pared back their profit expectations in recent months. They now see earnings in line with last year's showing as programming costs rise. However, as long as Pandora keeps growing, it will continue to be a compelling buyout candidate. It just won't be Jay Z doing the buying. It was never going to be him.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Pandora Media. The Motley Fool owns shares of Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.