Can Pandora Outpace Terrestrial And Satellite?

Sep.19.11 | About: Pandora Media (P)

Can Pandora (NYSE:P) outpace terrestrial radio's iHeart Radio and Sirius XM Satellite Radio (NASDAQ:SIRI) in terms of users? According to Wedbush securities analyst Michael Pachter the answer is yes, and that is why the analyst has initiated coverage and bestowed an outperform rating on the Internet radio giant with a price target of $14 per share.

In actuality there is little doubt that Pandora can draw in scads of users. Millions have downloaded the app and use the service. The more important question that needs to be asked is whether or not Pandora can turn those users into a virtual ATM machine that fills company coffers.

While some will dismiss Pandora simply because they consider it "radio," the savvy investor looks at the audio entertainment landscape with a more realistic eye that recognizes the fact that consumers have a limited number of ears (two in the case of most people) and a limited amount of time they can spend listening to any given form of audio. In the case of Pandora it is indeed a form of radio, and indeed a company worth watching. Any service that can get the millions of users Pandora boasts is worth of your attention even if you are a passionate Sirius XM and uber-investor.

The challenge of Pandora is not garnering users, but rater making money and/or curbing the costs associated with all of these users. Right now royalty rates are what is killing Pandora. The company shells out a hefty sum each time a user listens to a song. In theory the company sells advertising that will offset these royalty fees and then have something left over for profits. To date this has not been the case. The prospects do seem to be improving, but the company may need some help from the record labels in the form of better rates to take it to the next level.

The biggest threat for Pandora may not be iHeartRadio or Sirius XM. In many ways the biggest threat is a user base increasing faster than advertisers are willing to spend dollars. Sirius XM can get money from subscriptions, and Clear Channels iHeartRadio has the benefit of a massive built in audience listening to its terrestrial radio stations. Advertisers may well seek out iHeartRadio to get a bigger bang for the buck.

In summary Pandora can and will be around for quite some time, but the profits investors want to see may still be a year away. Pandora has the science of getting users down to a science. They now need to transfer energies into getting dollars out of those users in the form of ad dollars or subscription tiers.

Is Pandora a buy at current levels? It is awfully tempting, but I think that there is more that needs to happen to improve the balance sheet before it becomes a more solid bet.

Disclosure: I am long SIRI.

Additional disclosure: I have no position in Pandora.