Pandora (NYSE:P) reports earnings later this month, most likely sometime next or the week after.
With regards to the report, I offer the same thing I offered prior to last quarter's release:
Heading into the report, I am not nearly as bullish, but you must consider my perspective. I own Pandora for the long-term. What happens tomorrow matters, of course, but it's very unlikely that anything I hear tomorrow will shake me out of the stock.
As far as what happened today goes, the boys and girls in Seeking Alpha's Market Currents department summed up one reason for Pandora's massive pop today:
Pandora CEO Joe Kennedy provided more color on that news in an excellent interview with CNBC's David Faber. That interview was easily Kennedy's best appearance as Pandora CEO that I have seen. He was clear, convincing and concise:
Faber: Yet investors or those who would consider investing in your stock always come back to cost structure. Your growth nobody can argue with. But royalties are by far your largest cost. Paying the music providers. You know, make the construct for me that says you can actually become profitable given each listener you add you're also paying that huge royalty to th music company.
Kennedy: Well, the leverage in our model is really around revenue per hour. And when the hours are growing at a stratospheric rate like they are in mobile, which is great. Consumer embrace of Pandora personalized radio is amazing. But at that growth rate we don't really see the leverage. If you look at our business on the desktop, where the growth has slowed down, desktop advertising is more mature. We actually have a content cost to revenue ratio that's about 31%. actually very much in line with the kind of long-term guidance.
Faber: What is it on mobile?
Kennedy: On mobile it's well over 50%. But we've really demonstrated I think the power of the business model on the desktop where we've had a chance to develop the market, the ad market is more mature. and our growth has slowed a bit. And that will eventually be the same case in mobile.
Faber: You may be facing slowing growth but growing margins? is that what you're saying?
Kennedy: It actually is the case that as our usage growth inevitably slows, we can't continue to grow 87% year on year at this extraordinary scale. We'd end up being more than 100% of all radio if that were the case. So we inevitably slow and that enables in some sense the ratio to catch up and because the leverage in the model is revenue per hour that really does enable us to kind of unleash and fully demonstrate the power of this model.
It should not come as a surprise that Pandora's stock took another leg up and blew threw resistance at $9.00 after that interview. It continued to power into the close on an otherwise bad day for the markets, ending the session at $9.39, up an impressive 8.8%.
I fully expect more volatility. As noted, I do not know what to expect on earnings this month. I am, however, more long-term bullish on this stock than I ever have been.
Frankly, when Kennedy appeared on CNBC the day of Pandora's IPO, he scared me. He must have been nervous because he did a somewhat poor job of answering questions. In his defense, the people asking the questions (e.g., Bob Pisani) were in attack mode that day. In front of the camera, that can trigger some unease. That said, it's no excuse.
Fast forward to today and Kennedy handled Faber, who can be pretty vicious himself, quite well. Bottom line, mobile ad revenue is busting out and Pandora, as Kennedy noted, has been positioning itself to be a leader in the space for five years.
The vision of people like Pandora co-founder Tim Westergren is starting to pay off. As Kennedy told Faber, Pandora's mobile ad revenue more than quadrupled from $25 million in FY 2011 to over $100 million in FY 2012. The company also released the following tidbits today:
- 48 vehicle models today include Pandora across 18 automotive brands; 7 aftermarket manufacturers offer more than 75 devices
- More than 70 percent of Pandora's listening hours take place on mobile or other connected devices
I continue to buy the stock on a weekly to bi-weekly basis. After today's close, I have a cost basis of $10.14. I am down on the position by 7.4%. If and when volume and open interest picks up, I intend to open a supplementary long position in Pandora January 2014 $8 call options.
Disclosure: I am long P.