When And What Would It Take For Pandora To Be Profitable + Earnings Expectations

Nov.14.13 | About: Pandora Media (P)

In my previous article, I detailed some metrics for Pandora (NYSE:P) like their increasing subscriber base and increasing revenue. However, the primary comment that people had was that I was ignoring Pandora's continued losses. With this article, I will tackle that question. What will it take for Pandora to be profitable?

From my previous article, here is a chart of Pandora's revenue growth

In 2Q 14, Pandora had fewer listener hours than 1q but still managed more revenues. Let's look at Pandora's major expenses next.

As we can see Pandora paid more in licensing in 2Q 14 than it did in 1Q 14. It also seriously stepped up marketing expenses. If Pandora spent at the same levels per billion hours of music listened in 2Q 2014 for both content and marketing, the loss would have been transformed into a $5 million profit translating to about $0.03/share.

However at this stage with increased competition and the launch of Apple's (NASDAQ:AAPL) iTunes Radio, Pandora's increased focus on marketing is important. And Pandora did grow revenue faster in the last quarter than its costs as evidenced from the following chart which shows a narrower loss per billion hours listened than the previous quarter in spite of higher expenses.

With the current rate of growth, we can estimate roughly when Pandora will reach profitability.

If Pandora continues down its current path, profitability can come in the next two quarters.

This also provides some insight on what to expect for quarterly results on Nov 21. Basically a much narrower loss. By this chart about 2c/share on revenues of $171 million.

As discussed above Pandora could have been profitable if they spent less on marketing. Pandora could become profitable if their licensing lawsuit helps. Pandora can become profitable by next year even if neither of those happen. So, in conclusion, I feel Pandora management is taking the right steps. Market domination first, profits will come.

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.