Shares of Pandora (NYSE:P) have more than quadrupled since last year this time, closing at a new all time high record of $31.56 last Friday. Given a forward P/E ratio of 126, it is clear that the market has already priced in a tremendous growth story for Pandora, neglecting threats from the ever-increasing competition in the music streaming industry. This can be mainly attributed to several recent upgrades from analysts who suggest that the competitors will only have a modest impact on Pandora's growth. But is that really the case?
To see how Pandora is doing against its competitors, I thought of a simple experiment that can be easily duplicated by all investors in just a few minutes: An indirect survey using publicly available posts on Twitter (NYSE:TWTR) that compare Pandora's app to that of its competitors.
But before we start, let me emphasize that I'm not the only one concerned about the prospects of Pandora's future growth. This concern was also disclosed in a SEC filing by Pandora executives, ahead of their recent secondary offering:
Our revenue increased rapidly in each of the fiscal years ended January 31, 2007 through January 31, 2012; however, we expect our revenue growth rate to decline in the future as a result of a variety of factors, including increased competition and the maturation of our business, and we cannot assure you that our revenue will continue to grow or will not decline. You should not consider our historical revenue growth or operating expenses as indicative of our future performance. If our revenue growth rate declines or our operating expenses exceed our expectations, our financial performance will be adversely affected. Further, if our future growth and operating performance fail to meet investor or analyst expectations, it could have a materially negative effect on our stock price.
Pandora vs iTunes Radio
About half of Pandora listeners use one of more than 250 million Apple (NASDAQ:AAPL) devices out there running on iOS7, pre-installed with iTunes Radio. This is why there are now thousands of posts on Twitter comparing Apple's iTunes Radio to Pandora's application. These tweets can be used to conduct an indirect survey among the users who have tried both applications.
If you search for "Pandora iTunes Radio" on Twitter (here), you will find many recently posted tweets containing these keywords, most of which imply users' preference of one of these applications over the other. Due to the large number of these public tweets, I only considered 5 randomly chosen days after iTunes Radio's launch in my survey.
A total of 462 users had compared the two applications on those 5 days. Two thirds of them (309 tweets), implied their preference of iTunes Radio over Pandora's app. I also noticed that this 2:1 ratio in favor of Apple has stayed fairly constant after the launch of iTunes Radio. Don't take my word for it, repeat this experiment by simply reading some random samples of these public tweets (note: only read those tweets posted before the date this article is published, as things might artificially change afterwards).
This 2 to 1 ratio may not sound like a hands down win for Apple at first, but I believe it is a pretty impressive start for iTunes Radio at its early stages, compared to Pandora's app that has been around for more than 5 years. Apple has enough resources to substantially improve its radio app in later versions using customer feedback and more importantly, by enhancing its music recommendation system as more and more like and dislike inputs are collected from millions of iTunes users. Moreover, new iOS users in the future may not even feel the need to download another streaming application, as they already have a good one pre-installed on their devices.
Even worse: Pandora vs Spotify
Unfortunately Spotify has not been reporting its metrics like Pandora monthly. But to see how it is competing with Pandora to gain internet radio market share in the U.S, we can repeat the same experiment with the keywords "Spotify Pandora" (here). If you do so, surprisingly, you can see that there is no need to count: most of the tweets that compare the two applications (+85%), imply users' preference of Spotify over Pandora! You can also observe that the keyword "Spotify" on Twitter shows up as often as the keyword "Pandora", if not more. To do this, just search for the two keywords separately and leave the two search windows open for a while, Twitter will count the search results for you.
Given the fact that Spotify competes with Pandora in almost all platforms, this survey may indeed suggest that Spotify can be even a greater threat to Pandora than Apple. Spotify launched its US service in July 2011, and yet it reported over 6 million paid subscribers as of March 2013, of whom 1 million live in the U.S. Comparing this to Pandora's 3 million paid subscribers after 8 years, I would say, Spotify will soon surpass Pandora in terms of number of paid internet radio subscribers in America.
Even More: Pandora vs Others
You can conduct a similar survey by searching for "Pandora" next to keywords like "songza", "Rdio", "Slacker", "iheart", "8tracks", "SoundCloud", etc. Going through these search results, I was surprised not to find any evidence of a clear winning advantage for Pandora over its competitors. In fact, from what I can see, Pandora seems to have lost its "coolness" to most of the users that have compared it to other music streaming applications on Twitter. So I believe, Pandora will be losing many listeners to these late entry competitors in the future, unless it comes up with new attractive features. Again, I encourage you to do these experiments and read through the posts on Twitter to reach your own conclusions.
Bulls and Bears may disagree on the future prospects of Pandora's growth. But I am sure they would all agree on one fact: Pandora has already been priced for rapid future growth and perfection. The big question is will Pandora be able to continue to dominate the internet radio market and rapidly grow like it did in the past in face of ever-increasing competition? Recent trends on Twitter help me answer that question with a strong "NO".
Additional disclosure: I shorted Pandora last week ahead of Pandora's earnings call on Nov 21. The ideas and information presented in this article are not recommendations or financial advice, trade at your own risk.