Every month, Pandora (NYSE:P) announces its monthly listening metrics for the investors of the company. Some of the metrics include total listening hours and the total number of active listeners. Many analysts and investors were looking forward to hear Pandora's October metrics because this is one of the most important announcements since the company's IPO due to Apple's (NASDAQ:AAPL) introduction of iTunes Radio.
Less than 2 months ago, Apple launched its iTunes Radio hoping to grab a significant market share from Pandora and help its hardware sales. A few days later, the company announced that 11 million people tried its music application and at this rate, this application could catch up to the number of Pandora's active listeners within a few months. During Apple's earnings conference, the number of people who tested iTunes Radio was announced to be 20 million and this is the latest figure we heard from Apple. We don't know how many of the people that tested iTunes Radio actually decided to stick with it, neither do we know how many of those people were formerly Pandora users. It is very likely that a lot of people will be using both iTunes Radio and Pandora simultaneously, which should reduce Pandora's listening hours but not the number of active users.
Pandora hasn't "officially" announced its October metrics yet; however, the metrics were announced by the company's CFO Michael Herring at a Morgan Stanley conference. According to Mr. Herring, Pandora lost some active listeners while its total listening hours jumped sharply from September to October. During the month, Pandora's market share in the American radio space (which includes traditional, satellite and online radios) rose from 7.77% to 8.06%. It is very impressive that Pandora was able to increase its market share soon after iTunes Radio was launched.
Furthermore, Pandora's total listening hours jumped 9% from 1.36 billion to 1.47 billion. Keep in mind that Pandora recently canceled the listening limits it was imposing on its free users and this might have played a role in this increase.
Finally, Pandora lost some active members (probably to iTunes Radio) as its total active listeners fell from 72.7 million to 70.9 million. It is very bad for Pandora to post a loss of active listeners. In fact, I can't remember any other time where the company reported a loss of active listeners since going public, and this is not something to take lightly. Luckily, the loss of active members was offset by an increase in listener hours. Average listening per active member was up from 18.70 to 20.73 hours between last month and this month, which is sharp enough of an increase to offset the reduction in the number of active users.
It looks like Pandora will have to expand to markets outside of the US for growth. Currently, the company's product is launched in the US, New Zealand and Australia. The company has no presence in other countries because it would be very costly for Pandora to license content to be used in most countries around the world. Many content owners require upfront payments and Pandora doesn't have the sufficient cash flow to fund an international growth. Perhaps this is why the company sold more shares to raise $400 million recently.
Pandora is priced for perfection (just like most social media stocks) and it has to show rapid growth in order to justify its current share price. Even though the company's resilience in the month of October in face of iTunes Radio's launch is impressive, it is still not good enough from a valuation perspective. Keep in mind that Pandora is one of the most heavily shorted companies in the market, with a short-to-float ratio of 26.20% (as of October 15, according to Yahoo Finance) and short squeezes play a big role in creating rallies in speculative stocks lately. In the last year, we've seen companies like Tesla (NASDAQ:TSLA) and Solar City (NASDAQ:SCTY) rise to very high valuations, mostly due to short squeezes. This is why I would be very cautious about shorting Pandora despite its high valuation. Pandora is one of the companies that I own both calls and puts of simultaneously, in order to take advantage of a volatility that will be continuing on for a while. I don't expect this stock to crush anytime soon, as long as the Fed provides the market with free money. One of the biggest mistakes shorts make is to underestimate the power of the Fed.
At the current price, it makes little sense to buy Pandora. Unless you can hedge your position (whether it be long or short) with an opposite position (like I am doing with a straddle) I would stay in the sidelines for the time being.
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: I am long both call and put options of P.