Pandora (NYSE:P) IPO'ed this June with a valuation so high current shareholders would lose sleep over. I think seeing Pandora as a multi-billion dollar corporation is not only unthinkable, but flat out insane. I have no idea why the market keeps giving it such a high multiple. What exactly makes a company like this so disruptive in the market place? They offer free music. This business model will never work as the amount of royalties and expenses it has are more than its revenue from advertising.
Pandora already has heavy competition. Sirius XM (NASDAQ:SIRI) has majority of the market share in this space. Even though Sirius is a pay to use service, it will always be a more viable option since the company can remain profitable and afford to pay royalties. Another reason Sirius is a better option is due to the high-barriers to entry. Sirius has partnerships with the following organizations:
- National Football League
- Major League Baseball
- National Basketball League
- National Hockey League
- PGA Tour
Then do not forget the celebrities associated with them as well. Stars include Martha Stewart, Tony Hawk, Oprah Winfrey, and the man himself, Howard Stern. This is something that Pandora doesn't have. They don't have the resources to attract listeners. Users are willing to pay for these services. Pandora cannot afford the royalties needed to pay an organization like the NFL.
Pandora is a success because of its great business model. People get to listen to music for FREE. However, a shareholder needs to ask only one question and that is simply, "How do I make money on this?". The answer simply is that you don't. Pandora is simply a company that is not designed to make a profit. Even the CEO mentioned on CNBC, the company's main goal is not profitability. This is something shareholders did not want to hear and sent the stock down over 7% in the same day. I like Pandora and will continue to use them, however as an investment I cannot afford to put any money behind them. The valuations are another reason to not invest. Stick with Sirius XM, the company is in the midst of a strong turnaround. Not to mention it is nicely integrated with Ford (NYSE:F), Honda (NYSE:HMC), and General Motors (NYSE:GM).
Disclosure: I am long F.