Yesterday, Pandora Media Inc. (NYSE:P) reported Q2 earnings and they were disappointing on several fronts.
- Advertising revenue, where Pandora makes the lion's share of its top line results, grew 39% year-over-year to $177 million.
- Total revenue for Q2 2014 was $219 million, up 43% versus Q2 2013.
- Gross profit margin was 43% of revenue, up from 41% in Q2 2014; within that, content acquisition costs as a percentage of revenue improved to 51% during the quarter, down from 52% a year ago and 56% during Q1 2014.
- Non-GAAP earnings per share of $0.04 beat analysts' estimates of $0.03. On a GAAP basis the company recorded a loss of $0.06 per share.
- For Q3 2014 the company estimates non-GAAP earnings per share of $0.05 to $0.08 on revenue from $235 million to $240 million. According to Reuters I/B/E/S, average analysts' estimates were 8 cents per share on revenue of $235 million.
- Listener hours were 5.04 billion in Q2 2014, up 29% and 5% in comparison to Q2 2013 and Q1 2014, respectively. However, listener hours fell to 1.61 billion in June 2014 from 1.73 billion in May 2014.
- Listener hours matter most because they drive advertising revenue. The trend may exacerbate as competitors like Apple (NASDAQ:AAPL)/Beats, Spotify, Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) attempt to muscle in on Pandora's music streaming turf.
Will Pandora Trade At $11-$12/Share Warranted By Apple/Beats?
The market will award high valuations to momentum stocks until they disappoint on earnings or forward guidance. At a market capitalization of $5.9 billion (based on yesterday's closing price of $28.72/share), Pandora was trading at 7.6x run-rate revenue of $777 million. However, based on the 3x revenue multiple Apple paid for Beats Electronics LLC, Pandora should have traded at $11-$12 per share:
Apple paid about 3x revenue for Beats. Though Beats was private, we understand its revenue growth was impressive - growing to over $1 billion from less than $200 million in 2010. A multiple of 3x run-rate revenue of $777 million would give Pandora an enterprise value of $2.3 billion ...
The 3.0x revenue Apple paid for Beats represents how a third party would value a music streaming service. Based on that metric, Pandora is worth about $11.35 per share.
After disappointing Q3 earnings guidance and a decline in listener hours in June, Pandora's stock fell in after-hours trading by over 9% to $26/share. Whether it falls to the $11-$12/per share range warranted by the Apple/Beats transaction remains to be seen.
Disclosure: The author is short P. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.