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Static Surrounding Pandora’s Potential
Back in June, Pandora Media (NYSE:P) issued shares to the public for the first time. The stock is trading at close to half its highest price of $26 per share, which occurred shortly after the IPO. This may sound like a deal to some investors, but the company has quite a way to go to prove its business model will be successful, sustainable and profitable.
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Second Quarter Recap
Sales jumped 117% to $67 million. Advertising revenue made up the bulk of the total top line at 87% and advanced 118%. Subscription revenue brought in the rest and saw an increase of 112%. Management detailed that total listener hours hit 1.8 billion, advancing 125% from last year's second quarter and boasted that "consumers are enthusiastically embracing the dramatically better [listener] experience" and believes that it is "personalizing radio" to better compete against incumbent radio providers such as Emmis Communications (Nasdaq:EMMS), Cumulus Media (Nasdaq:CMLS) and Beasley Broadcast Group (Nasdaq:BBGI).
Total expense growth jumped 131% to $65.5 million and outpaced the sales increase as Pandora spent $14.5 million on sales and marketing and $33.7 million on content acquisition, or the need to pay music companies for the music its users stream. As a result, operating income fell 42% to $1.4 million. Higher interest and other expenses sent net income from operations into negative territory, or a loss of $1.8 million. Including costs related to going public, such as the redemption of convertible preferred stock, net income was negative at $3.2 million, or $4 cents per diluted share.
Outlook
For the full year, management expects total sales between $270 million and $275 million for year-over-year growth of between 96% and 100%. It expects to lose between 5 cents and 7 cents in earnings per share, which does not include stock-based compensation expense and is a rather outdated measure of determining earnings for tech companies.
The Bottom Line
In the prospectus it issued when going public, Pandora boasted 90 million users in the U.S. and a collection of 800,000 songs. Its ambitions going forward are to continue to boost advertising revenue. Growth has increased significantly since the company released mobile versions of its service. However, advertising revenue potential isn't as strong through mobile applications.
Additionally, competition is likely to increase for online music offerings. Apple (Nasdaq:AAPL) is currently the market leader in selling music while Pandora is leading a migration to rental services where consumers listen to a library of music, rather than purchasing individual songs or albums. New competitors in the streaming space are on the way, with firms such as Swedish-based Spotify releasing U.S. operations.
With a recent market capitalization of $2.2 billion, Pandora trades at approximately eight times forward sales estimates. It's difficult to predict the firm's cash flow generation capabilities, but it would need to generate roughly $100 million in cash flow for any profit multiples start looking reasonable. This will likely be many years off and means that most investors are probably better off waiting on the sidelines to see if Pandora ends up being a winner in what is likely to become an extremely crowded and competitive online music space. That being said, it is likely worth the risk compared to many old-school radio music providers. (For additional reading, take a look at How An IPO Is Valued.)
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Second Quarter Recap
Sales jumped 117% to $67 million. Advertising revenue made up the bulk of the total top line at 87% and advanced 118%. Subscription revenue brought in the rest and saw an increase of 112%. Management detailed that total listener hours hit 1.8 billion, advancing 125% from last year's second quarter and boasted that "consumers are enthusiastically embracing the dramatically better [listener] experience" and believes that it is "personalizing radio" to better compete against incumbent radio providers such as Emmis Communications (Nasdaq:EMMS), Cumulus Media (Nasdaq:CMLS) and Beasley Broadcast Group (Nasdaq:BBGI).
Total expense growth jumped 131% to $65.5 million and outpaced the sales increase as Pandora spent $14.5 million on sales and marketing and $33.7 million on content acquisition, or the need to pay music companies for the music its users stream. As a result, operating income fell 42% to $1.4 million. Higher interest and other expenses sent net income from operations into negative territory, or a loss of $1.8 million. Including costs related to going public, such as the redemption of convertible preferred stock, net income was negative at $3.2 million, or $4 cents per diluted share.
Outlook
For the full year, management expects total sales between $270 million and $275 million for year-over-year growth of between 96% and 100%. It expects to lose between 5 cents and 7 cents in earnings per share, which does not include stock-based compensation expense and is a rather outdated measure of determining earnings for tech companies.
In the prospectus it issued when going public, Pandora boasted 90 million users in the U.S. and a collection of 800,000 songs. Its ambitions going forward are to continue to boost advertising revenue. Growth has increased significantly since the company released mobile versions of its service. However, advertising revenue potential isn't as strong through mobile applications.
Additionally, competition is likely to increase for online music offerings. Apple (Nasdaq:AAPL) is currently the market leader in selling music while Pandora is leading a migration to rental services where consumers listen to a library of music, rather than purchasing individual songs or albums. New competitors in the streaming space are on the way, with firms such as Swedish-based Spotify releasing U.S. operations.
With a recent market capitalization of $2.2 billion, Pandora trades at approximately eight times forward sales estimates. It's difficult to predict the firm's cash flow generation capabilities, but it would need to generate roughly $100 million in cash flow for any profit multiples start looking reasonable. This will likely be many years off and means that most investors are probably better off waiting on the sidelines to see if Pandora ends up being a winner in what is likely to become an extremely crowded and competitive online music space. That being said, it is likely worth the risk compared to many old-school radio music providers. (For additional reading, take a look at How An IPO Is Valued.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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