Why Sirius Will Succeed And Pandora Won't

Includes: LMCA, P, SIRI
by: Mike Stallings

The age old debate took a turn for the worse with regards to investors in Pandora (P) over the last few days. As the rumors of an off quarter became a reality for the company, the stock plummeted from it's week high of $14.91 on Monday, all the way back to close today (Wed) at $10.86, with it still dropping in after hours trading. Although they only missed their revenue target by 1.8 million, they were a full penny worse in loss per share at 3 cents.

Sirius (NASDAQ:SIRI) on the other hand has done what it normally has done price-wise recently: remained stagnant. After the March 6th magic date past, some had speculated that Liberty would make a move and try to increase their stake in the stock. As expected, and what I wrote about earlier this week, nothing has happened (as of yet). So the stock has traded between $2.20 and $2.33 over the last 5 days, and is only 1 cent higher than it was 5 days ago. It is performing like the yo-yo I mentioned it has been over the last few months, and has shown no signs of changing that mentality in the short term. You can make money on this trend (as I mentioned numberous times) by writing covered calls against your positions.

So as it seems, one company seems to be headed in the right direction, one in the wrong. If you had asked me a few years ago, I never would have thought it would be Sirius (if they were alive at all) improving the way they have been. But I owned the stock as many of us did, and held out hope that they would find a way to turn things around. It seems now they have done that, though I believe they still have work to do. So why do I believe one will fail and one will not?

Pay before you play: Sirius currently has over 22 million subscribers, with about 18 Million of them the "self-pay" variety. Pandora currently has over 47 Million active users. On paper it seems that Pandora is twice as popular as Sirius is. The problem for Pandora is, their advertising revenue is not growing at the same rate as the subscribers are. This is evident by the latest numbers which include expenses that went from $138 Million last year, up to $285 million this year, more than double. The advertising revenue has not kept up with the growth. Pandora is in more of a "holding" pattern and still has not turned a profit, approaching a year after it has gone public.

On the other hand, Sirius has been consistently improving their metrics. This has been helped by them consistently beating the estimates and which continues to improve both FCF and EBITDA on a quarterly basis. Increasing subscribers for Sirius in most scenarios automatically increases its bottom line. I have mentioned before that the primary expense for Sirius is what they pay for their content or talent. That cost does not change whether they have 2M subs, 20M, or 200M. Pandora, when it increases Subs must ALSO increase their advertising monies or their model does not work. I have serious (no pun intended) questions about whether this current model will work for them, both short and long term.

Fight the Future: Sirius has projected (probably under projected) a year in which they will add an additional 1.3 million new subs. This was projected based on an estimate of 13.5 million new cars to be sold this year, and increasing penetration into the used car market. If we assume (as is usually the case with Mel) that the 1.3 is a low number AND add in the fact that the new car market is currently on pace to be 14 Million cars sold (additional 500K) the future looks even brighter for Sirius. I personally can see no less than 1.5 million new subs this year, even with the price increase. I do expect the churn to increase slightly, but should be offset with the increase in car sales, and more penetration into the used car market.

Pandora, on the other hand, has projected a much darker picture. The experts were projecting up to $86 million in revenue for their first upcoming quarter. Pandora has recently issued 1st quarter guidance of $72 to $75 million revenue (15% less) and only between $410 and $420 million for the year. So after a quarter in which they missed expectations, they are already providing more negative news. This is one of the primary reasons the stock took a nosedive over the last few days and until they can resolve this, the stock's future looks bleak.

Buyout: I believe there is a potential that Pandora could be bought out sometime within the next year if the price and metrics do not improve. There are many potential suitors out there, and one of them does include Sirius. Now I understand that Sirius itself could be bought out sometime by Liberty (NASDAQ:LMCA) as well, but let's assume for a second that Liberty does not make a move.

Pandora has about 162 million shares outstanding with the float around 60 Million. Based on the current share price, you are looking at an investment of about 815 Million to gain control of the company. With 60 million shares readily available, you are talking about only an additional 21 million shares needed on top of the float to gain control. Should Sirius continue to strive, increasing their cash flow, continue to have a need to do something with the extra money, and the possibility of the Pandora share price decreasing even more, why not buy them out?

They have 47 million active users, and although they are not paying subscribers (yet) it still is a high potential number to work with. They could offer a program (penetrating a new market which I believe long term this company needs to do to leave the single digit stock price days behind) perhaps with an ala carte type setup. Let folks add the Sirius content THEY want to add to their current Pandora setup, with or without commercials. The possibilities are endless and having the 47 million potential customers, could make such a move worth it. Putting Sirius' supreme content to work while tripling their potential current sub base could be a home run if executed correctly.

To finalize, I believe that Sirius still is the company with the brighter future than Pandora. There are too many things that Pandora needs to overcome. They are working with an unproven model, that depends on not only growing subs, but also having the advertising revenue keep pace with them. They have not turned a profit yet to date. They have one major stream of revenue (advertising), and do not "sell" a tangible product (like a radio receiver) in conjunction with their main revenue. Sirius has most of their hardware (satellites) in place already, has been improving their financial metrics, has a basic monopoly on the industry, tax write-offs and a list of other positives that go on and on.

Even if Pandora can somehow manage to turn a profit for a quarter or 2, unless they can find a way to keep up (and exceed) the impressive growth of subscribers, I do not like their prospects long term. Sirius has everything setup to succeed (less a partnership which could really make them be able to shoot for the stars), has a proven method focusing on the auto industry (which Pandora is attempting to do) and is light years ahead of them in that regard. Pandora also has admitted to not expecting to be profitable this year, which just puts them another step back.

Disclosure: I am long SIRI. I own puts on AAPL