The Future Of Pandora

May.24.13 | About: Pandora Media (P)

Pandora (NYSE:P) is an Internet radio service that allows users to stream music. In a dynamic and changing industry, Pandora has been able to demonstrate impressive growth. Recently, Pandora announced that it had hit the 200 million user mark, and in its fiscal year 2012 it reported earnings with total revenue of $427.1 million (up 56% from the year before). Together with its growing revenue and user base, listening hours have naturally been up substantially, and Pandora has now been able to cement itself as the leader in the online music-streaming industry.

Pandora has now just released its most recent earnings for Q1, with a reported a loss of $28.6 million (16 cents per share) on revenue of $125.5 million. Overall, the results (and the outlook given for Q2 where Pandora predicts it will lose 2 cents a share or earn up to a penny per share) were slightly better than expected, and sent Pandora stock upwards in after hours trading. But beyond just looking at the numbers for Pandora's recent earnings, there are a few important considerations for Pandora investors:

  • Pandora's recent Q1 loss was inflated by one-time costs, such as reserves for mobile-subscription returns. Excluding one-time items, Pandora's loss would have come in at only $18.2 million (10 cents per share). Overall revenue has been on a clear upward trend, which shows no indications of ending in the near future. It seems very likely that Q2 revenue will be higher still.
  • Pandora One (Pandora's premium ad-free service) surpassed 2.5 million users in Q1, with more subscribers being added in Q1 than all of fiscal 2013. Pandora One will be a main driver of revenue along with advertising.
  • While analysts and speculators have generally been bullish on Pandora over the past few months, there had been plenty of skepticism on Pandora's primary business model, with some having argued that the company will never be profitable due to the high royalty costs associated with providing content. But profitability now seems very realistic. According to management's outlook, we could very easily see profitability in Q2 or throughout the rest of the fiscal year. Non-GAAP revenue for fiscal 2014 is expected to be in the range of $615 million to $635 million, with Non-GAAP EPS coming in between ($0.02) and ($0.08).
  • Mobile monetization is one of the most important areas for Pandora moving forward. Mobile listening has been growing substantially, and it seems that this will continue as smartphone use will not be declining anytime soon. Pandora is able to earn revenue from mobile users in the same way it earns revenue from its desktop users.
  • One of the main developments in the quarter was Pandora implementing a mobile listening limit, where mobile users could listen to a maximum of 40 hours of free music each month. This will result in fewer mobile listening hours (and thus lower mobile advertising revenue), but some additional revenue from users paying 99 cents to continue listening for the rest of the month. The average desktop user has always brought in more revenue than the average mobile user, and we will need to wait until Q2 to get a better idea of whether Pandora's mobile listening limit results in increased revenue from mobile users.
  • I expect Pandora to be the dominant online streaming-music service for the foreseeable future. Spotify (not publicly traded) may be considered Pandora's main competitor, though I would consider Pandora to offer a better service. Some major tech companies have shown an interest in this market as Google (NASDAQ:GOOG) also offers a streaming music service in the way of Google Play (though it hasn't posed any threat to Pandora) and Apple (NASDAQ:AAPL) has been rumored to come out with some kind of streaming music service (dubbed "iRadio.")

Future Outlook

Obviously Pandora has been performing very strongly recently and the future outlook looks very strong, with profitability and continually growing revenue looking to be very realistic. However, that has clearly already been priced-in to Pandora's stock price, as the stock ran up over 100% in just the past few months. With that in mind, it would seem that buying Pandora at this stage is still fairly speculative.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.