Tickers in this Article: P, CBS, EMMS, AMZN, AAPL
Pandora (NYSE:P) lets users stream music from anywhere they can secure an internet connection, be it a home computer or smartphone on the go. To date, it has successfully captured two thirds of the streaming market and is currently growing revenues at an impressive clip. However, with an enterprise value at roughly 10 times sales and any steady profit generation uncertain, well into the future, the only winners so far look to be early investors who received proceeds from the public offering, back in June. Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Third Quarter Recap
Sales for Pandora nearly doubled, rising 99% to $75 million, in the third quarter. Advertising revenue made up the vast majority of the top line at 88% and did more than double. The remaining 12% stemmed from the fees that Pandora charges for an annual subscription; this product category rose 80%. In terms of related sales statistics, management stated that total listener hours more than doubled to 2.1 billion and active users jumped 65% to 40 million. Pandora dominates the U.S. Internet radio market with a 66% market share and now controls 4.3% of the total U.S. radio listener market.

Nearly all of sales were eaten up by costs to run and expand Pandora's operations, however. The largest cost category was content acquisition expenses, to pay for the songs that users listen to. This category jumped 107% to $37.7 million. Total costs jumped 103% to $74.3 million, leaving a scant $700,000 in operating profits. Net income fell 38.9% to $638,000 and meant $0 in earnings per share, given 191 million diluted shares outstanding. So far this year, free cash flow has been negative, as a small amount of operating cash flow was exceeded by capital expenditure needs. (These deals can make or break investors' returns. For more, see Analyzing An Acquisition Announcement.)

For the full year, Pandora expects sales between $273 million and $277 million and negative earnings of a couple of cents per share. Analysts currently project sales of roughly $275 million and a loss of two cents per share.

With a current market capitalization of $1.76 billion, the market continues to place lofty expectations on Pandora. To get to a P/E of 20, earnings would have to reach $105 million, which is likely many years off. The company currently dominates internet radio, with CBS Corp (NYSE:CBS) the next largest in terms of market share, but well behind at only 8%, according to a Pandora presentation.

Other traditional radio operators, including Clear Channel and Emmis Communications (Nasdaq:EMMS), are looking to break more into online radio to better compete with Pandora, as well as music download services from the likes of Amazon (Nasdaq:AMZN) and Apple (Nasdaq:AAPL).

The Bottom Line
The bottom line for investors should be that while Pandora's lead on streaming songs through the Internet is impressive, its potential for sustainable profitability, or even survival over the long term, is a coin toss, at best. (For related reading, see What We Can Learn From Steve Jobs.)

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At the time of writing Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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