Pandora (P) is a stock that tends to elicit a great deal of emotion from investors on both sides of the stock. Bulls and bears both seem to think the company is destined to either succeed or fail; not because it has a good or poor business, but because the company MUST succeed or fail.
With Pandora set to report its first quarter 2013 (Pandora's fiscal year ends in January) on May 23. With the stock virtually flat so far in 2012, the company's earnings will provide both bulls and bears with another chance to profit from how the stock moves in the days after earnings are announced.
Pandora's earnings calls are always revealing, and there will be several things to watch for on the call.
Important Items: The Usual Suspects
The Pandora "story," as it is often argued from the bullish side, is a long-term one. To that end, it is more important to see what the company says about its long-term path than what each individual quarter is like, bulls argue. Therefore, it is important to see what Pandora says about its long-term issues, which we reiterate below.
- Content costs: In Pandora's last earnings release, revenue grew 70.71% from prior year levels as the company drew in both more advertising and paying subscribers. However, the company's content acquisition costs grew by 101.25%. Pandora's business model follows a cycle: the more users there are, the more advertising Pandora can sell. But the more users the company has, the more it must pay in royalties. This is an issue that the company will have to address at some point, chiefly by accelerating monetization growth of its user base so that revenues can grow faster than expenses. It will be important to see what Pandora says regarding its outlook for content costs in the quarters ahead.
- Mobile monetization: Pandora is slowly but surely monetizing its mobile users. According to the company's fourth quarter conference call, mobile RPM grew to $20 in fiscal 2012, compared to $13 in fiscal 2011 (for the sake of comparison, the company had a desktop RPM of between $60 and $70). While Pandora is growing its mobile revenue, the pace of growth is still not up to the numbers that the market wants to see. Therefore, any color that Pandora provides regarding mobile monetization trends and expectations should be closely scrutinized.
Important Items: The Unusual Suspects
Content costs and mobile monetization are the 2 main issues that investors traditionally focus on when it comes to Pandora. But, there are several other issues that we feel investors should focus on.
- Metrics tracking: On May 16, Pandora announced that its audience metrics were finally being tracked by a third party. Triton Digital will be tracking Pandora's data on both a national and local level via a customized platform. According to the March 2012 Triton report, Pandora had a 71% share of internet radio listening out of the top 20 networks in the United States. In addition, the results for March 2012 show that Pandora is the largest adult 18-49 radio network in the United States, with a cumulative weekly audience of 23,874,175. Now that Pandora's metrics are tracked by Triton, it will be easier for advertisers to track their campaigns, in theory drawing more of them to Pandora and thus allowing the company to grow its revenue. Given that a good deal of a company's earnings call are spend talking about the future, not the most recent quarter, hopefully Pandora will be able to comment on what kind of difference it has seen so far with the Triton system, and what kind of feedback, if any, it has received from advertisers regarding the benefits that these metrics provide them.
- Outside partnerships: Pandora has been moving quickly to integrate its service into a variety of channels, including cars and entertainment systems; the company recently inked deals with Dish (DISH), DIRECTV (DTV), Suzuki, and Nissan. These deals are designed to increase Pandora's consumer reach, thus making the company a more attractive destination to advertisers. We would like to see the company provide some detail on its future partner plans, as that represents a potentially substantial opportunity for Pandora (it is also an essential pathway, the company must get in front of its content costs at some point).
Market Expectations & Whale Watching
Just what is the market expecting from Pandora this quarter? According to Reuters, the consensus estimates for this quarter, taken from 20 different firms, call for a loss of 17 cents per share. In its last earnings release, Pandora itself estimated a loss of between 18 and 21 cents per share for this quarter on revenues of between $72 and $75 million. For all of 2013, Pandora estimates a loss of between 11 and 16 cents per share, on revenues of $410 to $420 million with the Reuters consensus calling for a loss of 17 cents per share (Reuters does not break down consensus revenue estimates). For the record, the Reuters average price target for Pandora currently stands at $13.11, implying upside of 30.19% from current levels.
We feel it is also important to see just how institutional and other large investors positioned themselves in Pandora. Last week was the week to file 13-F's, and therefore we are able to see how "whales" positioned themselves.
On balance, institutional flows for Pandora were slightly bearish for the first quarter. 13-F filers cut just under 5.21% of their positions in Pandora during the first quarter. However, Crosslink Capital, the company's largest shareholder with a stake of over 21%, did not alter its position in the first quarter. Below we break down the 5 largest buys and sells that occurred in Pandora during the first quarter of 2012.
|Firm||Transaction Type||Change in Shares Held||Current Stake|
|Bank of America||Sale||-1,077,940||301,658|
|Cavalry Management Group||Liquidation||-300,000||0|
|J. Goldman & Co.||Liquidation||-100,000||0|
|Meru Capital Group||Liquidation||-83,697||0|
|Granahan Investment Management||Initial Purchase||+1,140,000||1,140,000|
|Brown Advisory||Initial Purchase||+1,305,650||1,305,650|
|JAT Capital Management||Initial Purchase||+1,770,597||1,770,597|
|Steadfast Capital Management||Initial Purchase||+2,423,074||2,423,074|
|T. Rowe Price||Purchase||+4,660,418||6,504,679|
|Net Share Counts||N/A||+6,164,174||13,477,933|
The largest individual transactions for Pandora were skewed to the bullish side, however overall money flows were slightly bearish. It will be interesting to see if this trend will continue in the second quarter of 2012.
Pandora's upcoming earnings release and conference call will likely have something for both bulls and bears, and it will be important to listen closely to see what the company says about the state of business and its outlook for the quarters ahead. Pandora's stock has shown an inclination to move not only off of the company's headline numbers, but its conference call commentary as well, and therefore savvy investors should pay close attention to both in order to have a leg up in the markets.
Additional disclosure: We are also long Pandora June $9 puts and short June $11 calls