Just look at the after hours trading of Pandora (NYSE:P) on March 6th and you will see red. The company dropped almost 20% from a close of $14.23 to an after hours blood bath down to $11.55. Is this the beginning of the end for the leader in Internet streamed music? The simple answer is a resounding no.
While Pandora certainly has challenges from a business perspective, the concept of streaming music is not going to go away any time soon, and Pandora has the resources and ability to wade through the tough times.
As is often the case when bad news happens, I think that we saw an overreaction to a disappointing quarter for Pandora. Certainly the shares deserved to slip, but a 20% dip presents a wonderful opportunity, in my opinion. To be clear, I am not invested in Pandora, and have stated that I see it as a great stock for traders. I have seen it as a buy under $11, and a sell at about $15. That represents a nice trading range.
The news from Pandora was not all bad. In fact, some high points offered up by the company include:
- Revenue of $274.3 million, up 99% year over year
- Q4 revenue of $81.3 million, up 71% year over year
- Listener hours of 8.2 billion, up 109% year over year
- Q4 listener hours of 2.7 billion, up 99% year over year
- A 69.8% share of the Top 20 Internet radio market, up from 58.3%
- A 5.5% share of the U.S. radio market, more than double last year
- Active users reached 47 million, up 62% year over year
These statistics are impressive. These statistics represent compelling growth. These statistics are what will drive the ultimate success of Pandora.
In fairness, Pandora's impressive growth in the metrics above does come at an expense, and that is where the risk factors of an investment in Pandora must be considered. You can have the greatest product in the world, but if you lose money with every growth spurt you could get into trouble fast.
In many ways Pandora is treading water. Their expense growth is just as big as the positive points outlined by the company. Total costs and expenses went from $138 million a year ago to $285 million this year.
Still , despite what seems to be modest prospects from a business standpoint, Pandora always presents an interesting investment story. As a long time investor in Sirius XM (NASDAQ:SIRI), I know all to well the challenges that face Pandora ahead. I also know that the reward can be great, and the advantage I have is that I learned the story by being invested in Sirius XM.
As an investor we try to look at fundamentals to justify our investment decision. We all take on some risk as well in hopes of a grand reward. It is exactly what many investors in Sirius XM did. You would think that those long term satellite radio investors would know this script by now. Pandora is not a fundamental story. It is a speculative play that is in its relative infancy at this point. It is why, in my opinion, that Pandora is a good play for traders looking to make a profit on a swing (either up or down). A lot depends on your portfolio mix. For me, although I see the trading window in Pandora, I have yet to invest in the company. I simply have my funds tied up in other places that I feel better suit my needs at this point in time.
To me Pandora is not a story of instant profits from business, but rather a story of growing in size to a critical mass and surviving the competitive audio entertainment landscape to a point when they can leverage its biggest asset: The user base.
Imagine if this company instituted a $6 per year Music Royalty fee to help offset the massive costs associated with streaming music. Even if they lost 20% of active users, they would still have 38,000,000 users paying an additional $1 per month. Suddenly revenue would jump by $228,000,000 and the company would nearly offset the entire content acquisition cost. Garnering and additional $0.50 per month from each active user makes a substantial difference. What if they are able to get advertisers and sponsors to bring in an added 50 cents instead?
That is how close this company is to getting over the hump and turning what appears to be a poor business model into a very good one. That is the potential of Pandora.
Yes, the naysayers will focus on the losses and fundamentals, but savvy investors look deeper and to the types of things that can drive a company over the top. Certainly Pandora could fall off of the edge, but that is the risk associated with any investment. Personally I see an audio entertainment company that cannot only survive, but begin to thrive. It will take time, but eventually it will happen.
Is the sudden drop in Pandora a gift? I think so. At least for the right type of investor.
Disclosure: I am long SIRI.
Additional disclosure: I have no position in Pandora.