For quite some time now, there's been talk that internet radio service provider Pandora's (NYSE:P) business is under a big threat due to competition from Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). However, Pandora has successfully navigated through the competition so far, and its performance on the stock market has also been impressive. Pandora shares now trade close to their 52-week high, having gained more than 200% over the last one year. Moreover, recent results also show that the company has been making good progress. But, danger is still lurking around, and Pandora is necessarily not a good investment. Let's take a look at both sides of the coin.
The good part
Pandora has made significant progress in product innovation. It entered 2014 with strong momentum, executing well on many fronts and enjoying first-mover advantage due to its Pandora Everywhere strategy. Pandora has been focusing particularly on mobile monetization, given that the majority of Pandora's listening hours occur on mobile.
For example, listener hours grew 16% to 4.54 billion in the fourth quarter of 2013, up from 3.91 billion in the year-ago period. Active users increased 13% to more than 76 million from 67.1 million last year. Moreover, its share of total U.S. radio listening increased to 8.6% at the end of 2013 from 7.6% last year. To top it, Pandora's market share increased from 7.7% last year to 8.57% in January this year. Pandora's continuing growth can be credited to the strength of its product. It continues to invest in innovations to enhance and improve its service for users and make Pandora available everywhere.
Pandora has made significant investments in playlist technology by analyzing metadata and user interaction. Apart from deciding which songs to play and when, its refined playlist technology also gauges other factors such as repetitiveness, song duration, and new music discovery; delivering an enhanced experience to listeners.
Pandora has improved upon the listening experience by making it available everywhere. The company has personalized its product to customers' needs at home, office, car, or on any other connected device.
For instance, Pandora has made its way into 9 of the 10 best-selling passenger vehicles. Also, more than 4 million unique users have activated Pandora through native integration across 25 major automotive brands. Pandora has strengthened its partnerships with GM (NYSE:GM), Chrysler (Pending:CGC), Mazda (OTCPK:MZDAF), Hyundai (OTC:HYMLF), Toyota (NYSE:TM), Nissan (OTCPK:NSANF), and Honda (NYSE:HMC).
The bad part
Competition can be a good thing, but not in the case of Pandora. The company struggled when Apple launched iTunes Radio. The company is starting to recover; however, another fatal blow may be on its way. Numerous reports are pointing toward the fact that Spotify, one of Pandora's biggest rivals, is preparing for an IPO. Reports claim that Spotify has hired a U.S. financial reporting expert, which is a sign that the company is gearing up for an IPO.
Of course, the company hasn't confirmed this speculation (neither have they denied it), but it makes sense. Spotify has raised $250 million in the last one year at a reported valuation of over $4 billion. As per Reuters, Spotify could be worth over $8 billion and the IPO looks likely as the company will need financial backing to fight off increasing competition. This is definitely bad news for Pandora. Spotify could use this cash to gain market share from Pandora, thereby hurting the company and investors.
What makes matters worse for Pandora is stagnating growth. The company lowered its earnings guidance for the next quarter, which overshadowed its impressive quarterly performance. For the first quarter, Pandora forecasts a loss of $0.14 to $0.16 per share, missing analysts' estimate of $0.12.
In addition, in the 10K filing, Pandora's CEO mentioned that the company's business is maturing and growth will slow down drastically in the future. The company still doesn't make any profits and a "maturing" business indicates that Pandora might not be a good investment. So, despite all the impressive-looking moves that Pandora is making, it might not be a convincing investment.
Time to sell?
Pandora is still not profitable. The maturation of its business, along with increasing competition, is not good news for Pandora investors. I agree that the company has been making some really good moves, gaining market share, but the decline in its active user base seems to have started already. In January, active users fell to 73.4 million from 76.2 million in December. Moreover, if Spotify files for an IPO, it would have access to enough resources that would help it improve its services and eat into Pandora's share.
Also, at a forward of 81, Pandora is expensive. And with the stock trading close to its 52-week high, I think it would be wise for investors to take some money off the table. However, Pandora could be a worthy investment if it is able to sustain its active user base for a few quarters and turns profitable. Until then, it would be a good idea to stay away from Pandora.
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.