When you consider the number of individuals who watch NASCAR, it's quite obvious that as a whole, Americans love racing. The words "first", "winner" and "victor" all conjure up images of celebration for the one who can claim those titles, and disappointment on behalf of the loser.
Such is the case, though, only when that race has the contestants starting at the same place. In the case of Sirius XM (SIRI) and Pandora (P), "winning" the race to $5 per share would be a wonderful victory for Sirius XM, and "winning" the race would be a terrible defeat for Pandora. Unfortunately, I feel Pandora just may "win" this one.
Consider the fairly predictable poor Q3 earnings report by Pandora after the closing bell. While the company did beat expectations by several cents per share, its guidance was disgraceful, and the explanations as to why simply points to the poor business model I have spoken of and warned investors about time and time again.
It may not be clear by Joe Kennedy's words :
What we're really seeing from advertisers, I think has to be first understood in the context of again our Fiscal Year quarter is November December and January and so what we really experienced over the past couple months is increase in caution from advertisers about macroeconomic concerns, the fiscal cliff particularly in January, and that really is the difference between what we know now and what we knew three months ago when we last gave guidance. The visibility of January is never particularly good and the cautiousness surrounding January at this point further deteriorates the visibility and drives us to a more cautious position. As you suggest, November and December are seasonally strong months and we certainly expect a good November and December but are very cautious about January at this point.
that the underlying problem here is far greater than the smoke and mirrors of some "fiscal cliff." But Kennedy's words do highlight a severe problem for Pandora. The simple fact that a very minor hiccup can send future predictions down so sharply as to expect a 9 cent loss per share on a single month's worth of income vs. previous estimates of a 2 cent gain, is a serious issue.
Though, was this not expected to eventually happen? The fact is Pandora has grown its user base rapidly, yes, but it has failed to monetize these users faster than those users can gobble up content. This is content that Pandora pays for, yet gives away for free. Obviously buying things and then giving them away for free is not a sound business move unless you have deals on the other end through advertising to at least cover your costs of operation and content acquisition. Pandora is simply unable to secure enough advertising. Period.
Furthermore, rather than attempt to gain additional revenue, Pandora seems to be taking the route of crying to Congress about what it feels are "unfair" royalty rates which it has to pay. But really, when you consider Pandora pays only around $0.27 per user in royalties, and Sirius XM pays nearly $1 per user, it's quite obvious which has the better deal. Pandora would do better focusing its time and energy (and money) on acquiring more revenue, rather than wasting it lobbying and donating to various politicians.
What it boils down to is this, Pandora has a business model which is not working. Nearly 60 million users in a free model equates to 60 million mouths to feed, before you can feed yourself. That's a serious problem, and one which I see Pandora unable to address in reasonable fashion. I believe Pandora will see $5 within the year, and given the sentiment of the insiders who are quietly bailing out of their positions in a sea of red insider sales, I believe they see the same.
Sirius XM, on the other hand, is the exact opposite. Working on a subscription model that prices its service on a per user basis in order to ensure costs are covered, Sirius XM is able to monetize the user base as soon as those users become paying subscribers. Even at over triple the royalty rate on a per user basis when compared with Pandora, Sirius XM is able to pay these costs, cover costs of operations, and turn a profit. It's a solid and predictable business model and that is one of the reasons it is such a good investment.
Beyond this, consider what I wrote in an article earlier this year :
But the question on the minds of investors who remain, and of course the new blood who have recently bought in, is probably where is the stock price of Sirius XM going from here, and how long will it take?
My answer to that? Up to $5 per share and beyond, and within two years. That's right, I expect from today's $2.50 that Sirius XM will exhibit nearly 100% appreciation in share price by the end of August, 2014.
Within the article I explain how investors should make out well from the impending take over by Liberty Media (LMCA) and what is expected to be ensuing share buybacks after Liberty takes control. This should be coupled with the continued strong performance of Sirius XM's business model, as well as increasing subscribers on the backs of new and used auto sales. Sirius XM paints a picture of a company which is not only growing subscribers but is also increasing income faster than expenses at the same time.
That is a sound investment, and if you are looking to get into the media space, I see few companies with the future prospects of Sirius XM in the next two years. $5 is my target, and end of year 2014 is my timeframe.
In this race to $5, I believe both companies will get there, and unfortunately for Pandora, it will get there long before Sirius XM.
Disclosure: I am long SIRI.