Pandora's Market Share Is Improving, But Profitability Continues To Flounder

| About: Pandora Media (P)

Internet radio company Pandora (NYSE:P) announced the results for its fiscal year 2013 fourth quarter late last week. Results were mostly better than expected, with revenue surging 54% year-over-year to $125 million. Earnings were a penny higher than consensus forecasts, as the company lost just $0.04 per share, significantly better than the year prior.

Pandora's service continues to surge in popularity thanks to the convenience of mobile and continued market share gains. Hours listened jumped 53% year-over-year during the quarter to 4.05 billion hours, while hours listened for the year grew 70% year-over-year to 14.01 billion hours. Perhaps even more telling, the company's share of the US radio market in February jumped to a whopping 8.48%, up 274 basis points compared to the year prior.

For much of its early history, Pandora was limited to PCs, but the rise of mobile devices has really helped boost the service's popularity. Mobile listening now accounts for 77% of total listener hours, and we would not be surprised to see that number grow as mobile networks improve. We've previously mentioned why we believe mobile advertising is a very attractive format for Pandora, and it seems advertisers agree, as mobile ad revenue jumped 111% year-over-year to $80.3 million. Revenue per thousand listening hours on mobile devices increased a modest 9% compared to last year, though that metric could now improve that Pandora is once again limiting free listeners at 40 hours of monthly usage.

Although we're seeing nice growth from the subscriptions segment (up 74% Y/Y), we're a bit shocked by this move. With Spotify offering a strong competing product and Apple (NASDAQ:AAPL) attempting to get into the streaming internet radio business, we think limiting Pandora user hours could cause listeners to flock to another service…and they may not come back.

The cash flow situation for Pandora remains weak, as the firm generated a slight loss of $250,000 from operating cash flow for fiscal year 2013, leading to full-year free cash flow of negative $7.8 million. Still, the firm has close to $86 million in cash and equivalents, so liquidity will not be an issue going into fiscal year 2014.

Looking ahead, revenue guidance for fiscal year 2014 suggests strong sales growth will continue. The firm is looking for revenue of $600 million to $620 million, a touch above consensus estimates. Earnings per share are also a bit above consensus estimates, with the firm anticipating earnings per share of -$0.05 to $0.05 net of stock-based compensation expenses. However, we aren't anticipating free cash flow to jump materially in fiscal year 2014.

Overall, it's hard not to be attracted to Pandora's huge revenue growth-except for the fact the company makes no money at this time. With the competitive environment intensifying-let's not forget Pandora isn't only competing with Spotify and terrestrial radio for mobile ad dollars, but also Facebook (NASDAQ:FB), Google (NASDAQ:GOOG), and thousands of other companies-we do not believe Pandora looks attractive at its current valuation. With CEO Joseph Kennedy set to leave the company, the ride ahead could be rather bumpy. We aren't interested in adding it to the portfolio of our Best Ideas Newsletter at this time.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Valuentum holds shares of Apple in its Best Ideas Newsletter.