Pandora Media Inc. (NYSE:P) provides Internet radio services in the U.S. Unfortunately for it, it has been gaining competition in its industry. A recent competitor, Apple (NASDAQ:AAPL), announced its iTunes Radio offering, almost a carbon copy of Pandora, in June 2013. iTunes Radio has one big advantage over Pandora from the start. It is integrated deeply into iOS (Apple's OS). It can be accessed through Siri. It is built directly into iTunes -- an application built into all iDevices. It also takes a user's iTunes library into account when picking songs. Many feel that the iTunes song library is superior to Pandora's. In its latest announcement Apple added iTunes to its Apple TV offering. This is convenient for Apple TV users. Plus it another advantage over Pandora, which is not available on the Apple TV platform. Apple TV also has support for AirPlay iCloud streaming. This will allow users to push media stored on their iCloud accounts to their Apple TV's.
The Apple TV advantage is really only a small part. Apple has about 40% of the smartphone market share in the U.S. That means that most of the iPhone users are likely to switch to iTunes Radio in short order, if they haven't already; and about 50% of Pandora users connect through iDevices. Further many say that iTunes has a better library of songs; and Apple aficionados are bound to believe that Apple's iTunes is more user friendly. They are used to Apple applications. This essentially means that Apple will have a huge "in" with at least 40% of the smartphone market.
Some may argue that Apple's appeal is waning even in the smartphone market. However, last weekend's sales of 9 million of the new iPhone 5s's and 5c's would seem to indicate that Apple's products are still popular. Plus Apple has the Mac, the Netbook, the iPad, iOS 7, etc. Apple said 200 million iOS devices have already updated to the latest version of iOS 7, which has support for iTunes Radio built into it. Apple CEO Tim Cook said Apple would ship its 700th iOS device in October 2013. This means there are still a lot more people who can update to iOS 7, with the built in advantage for Apple's iTunes Radio.
Worldwide Google (NASDAQ:GOOG) may be the bigger problem for Pandora. New data from IDC found that Apple's share of the global smartphone market slid to 13.2% in Q2 2013 from 16.6% a year earlier. Meanwhile handsets running Android (the Google OS) jumped to 79.3% from 69.1%. In other words Google is a huge force in the smartphone market worldwide. Google Play Music All Access and Google Play Music Standard provide a similar service to Pandora. Google Play Music boasts an online music store, music cloud storage, shippable streaming radio, and an unlimited music streaming subscription all into one. Between Apple and Google they largely control the smartphone OS market in the U.S. (and worldwide). That means they have a huge leg up in mobile access to streaming radio. The table below shows the top U.S. smartphone platforms, which may be more pertinent to Pandora investors as Pandora is a U.S. only company so far.
Pandora clearly has its work cut out for it to best Google and Apple in this market. When you consider the following Pandora supplied chart for mobile radio listening hours versus Web radio listening hours, you realize how serious a problem Pandora has.
Essentially almost 80% of all listening is expected to be done via mobile soon; and this should give both Google and Apple a huge advantage over Pandora. Both control huge parts of the operating system environments commonly used in the U.S. They get to embed their applications into their OS's. This should help their applications work more seamlessly and more quickly. In other words, both Apple and Google have a leg up on supplying more user friendly radio experiences. Plus each can effectively advertise itself as the system to use on its OS; and both are planning to make most of their money on the hardware and on ads. Pandora needs to make all of its money on ads and subscriptions. Further both Apple and Google are huge companies that have good negotiating power with music suppliers. They can likely get their music cheaper in the long term than Pandora can.
Pandora is planning to get its "leg up" via the auto market. The company recently said it has notched more than 2.5 million unique activations through cars -- a fourfold improvement over a year ago. It accomplished this by integration with almost two dozen automotive brands and a handful of companies that make device drivers people can put in their cars themselves. On its face, this is impressive. However, it is also an area where one can expect newly started services from Apple and Google to eventually thrive. For instance, Nissan has recently signed a deal to partner with Apple to display ads on iTunes Radio through iAd. It is only logical that many more automakers will desire to eventually make deals with these two big innovative titans. It is unlikely that Pandora's early lead in this area will last.
With these two big titans merely starting their marketing of their services, how is Pandora doing with regard to profitability? No so well as it turns out. Pandora reported a Q2 loss, even after revenue jumped 58% year over year. The digital radio provider reported a loss of -$0.04/share (or -$7.8 million) versus a year earlier profit +$0.03/share (or +$5.8 million). That's progress the wrong way. Plus Pandora guided lower for Q3 at $0.03 to $0.06 per share. That was below analysts' average forecast of $0.08/share. Pandora cut its full year outlook too to $0.00 to $0.05/share (or a median of $0.025/share). This was effectively below the analysts' forecast of $0.05/share. It did raise its revenues target to $640 to $655 million from the average analysts' view of $634 million. However, this is not overly impressive considering the competition from Google and Apple is just beginning. They both have the ability to put monetary pressure on Pandora, so showing profitability is highly important in this case.
Further there are many more competitors out there. Hulu with its Shoutcast Radio is one. Microsoft Media is another. Yahoo music could easily become another area of interest for Marisa Mayer, Yahoo's new CEO. She is intent on bringing new interest to Yahoo, and this could be an area she puts emphasis on. I could go on. However, the point is that Pandora may have been the first company to build a good platform to address this media issue; but it may easily become to music streaming what the Osborne was to the PC industry -- a fleeting first that disappeared quickly. The big differentiator then was the operating systems. IBM and its compatibles had DOS. Apple had the Apple OS (and later the Mac OS). The Osborne, which was a good early product, simply disappeared without its own popular OS. Pandora may do this.
In sum Pandora has been doing a decent of even a good job of starting its business, but it is not profitable now. In the future it has to compete more directly with the two new huge innovative players in the industry -- Apple and Google; and both of these have OS advantages in the mobile and other markets that Pandora cannot hope to match. Both are bigger with a lot more money to rip competitors apart. Both have well earned reputations as innovators.
In this environment Pandora is a bug that is likely about to get squashed. Further Pandora is valued on air or hype, which is true for neither Apple nor Google. Pandora has no PE. It has an FPE of 90.63; and that is highly questionable after Pandora's recent EPS misses. Insiders have sold -22.9% of their stock in the last six months, which is not a sign of a company with a bright future. Pandora has short interest of 26.70% of the float. It has negative cash flows. On top of this the Fed just lowered its U.S. economic growth estimates for both 2013 and 2014. Pandora, whose stock value is clearly predicated on fast growth, seems likely to at the very least hit a big speed bump in the road in the near future. Its Q2 results and guidance were already disappointing. From the Fed estimates, this situation is likely to worsen. Companies that are "priced to perfection" do not do well in the absence of such perfection; and this absence seems virtually assured in the near future for Pandora.
Stifel Nicolaus analyst Jordan Rohan said that the immediate impact from iTunes Radio hints at large market share losses for Pandora. He said approximately 50% of Pandora's users access the service via one of apple's iOS-based devices. He estimates that that will lead to a 10% - 15% reduction in Pandora's current listening hours over the next four to six months. For a company that is supposed to grow like gangbusters in order to justify it extremely high valuation, this is an extremely negative outlook; and it is likely just the beginning of the bad news. Eventually Apple and Google will get more aggressive with their attempts to take market share from Pandora. Pandora is almost certainly the bug that will be quashed.
With the all of the above in mind, Pandora is a sell. It is another small media competitor that will almost certainly be driven to near extinction. It may sell out before then; but this is probably the best result investors can hope for. For those huge fans, who say nay to my argument, I point you to the Blackberry example. A few years ago this company was a hugely stronger entity than Pandora, yet it has been practically driven out of business by the likes of Apple and Google. Those who think these two innovative behemoths cannot do the same to Pandora are most likely deluding themselves. Pandora is a sell. Aggressive traders may wish to short it, especially given the Fed cut to the U.S. economic growth outlooks for 2013 and 2014. These virtually ensure that the profit growth that Pandora has forecast will not occur.
The two year chart of Pandora provides some technical direction for this trade.
The slow stochastic sub chart shows that Pandora is near overbought levels. The main chat shows that it has been in an uptrend for roughly one year. It is far overextended to the high side in that uptrend. Even without the fundamental problems that have recently appeared on the company's horizon (Google and Apple products and the U.S. economic growth downgrade by the Fed), Pandora was due for a retracement on a technical basis alone. With all of the new competition and the worse than expected economic situation, Pandora is due for a big retracement.
It is often hard to predict exactly when the momentum/HFT traders will let go of one of their momentum darlings, so shorting is more risky than it should be. Stocks with extremely high short interest can be easily squeezed (and they frequently are). However, if I owned Pandora now, I would be doing what the insiders have been doing in droves (-22.9% in the last six months). I would be selling Pandora.
Pandora has a CAPS rating of one star (a sell). Analysts give it a mean recommendation of 2.4 (a low buy); but they are historically behind the curve on sell recommendations; or perhaps they just like to give their funds time to sell their own holdings before they officially downgrade the stock. Believe the CAPS rating here. Believe the fundamentals. Sell. It is hard to see anything but future frustration with the two innovative behemoths of Apple and Google firmly in the field of competition now. Plus let's not necessarily leave Amazon and many others out. Pandora is a sell.