Pandora Continues To Win Ears

Jun. 8.12 | About: Pandora Media (P)

Internet radio company Pandora (NYSE:P) reported some positive news Wednesday, with hours-listened in April rising 87% year-over-year. This comes after a very strong March, which saw hours-listened increase 88%. The company now has 5.8% of the radio market share in the US, compared to 3.1% in April of 2011. Further, Pandora increased its revenue guidance range for fiscal 2012 to $420-$427 million from $410-$420 million, and the firm also trimmed its loss guidance to $0.07-$0.11 from a loss of $0.11-$0.16. The company also joined with Mazda to make its internet radio sync with its auto offerings. Several other car-makers such as Ford (NYSE:F), GM (NYSE:GM), and Toyota (NYSE:TM) already have this functionality, and we think this is a feature that could soon become standard.

We suspect a big chunk of this user growth is coming from mobile, since Pandora, unlike competitor Spotify, allows users to listen on their iPhones (NASDAQ:AAPL) and Androids (NASDAQ:GOOG) for free, as long as they don't mind listening to ads. As internet connectivity and network strength grows, we think Pandora will continue to grow share as people move away from listening to iPods and preset music libraries. We believe Pandora's willingness to rely on ad dollars for its mobile product gives it lower resistance for consumption. Using Spotify for free on a mobile device is a complicated and tedious process, rendering the mobile app only useful for paid subscribers, in our view.

However, we think Spotify may become a very strong competitor as it begins to create radio stations that can generate music for the listener. At its inception, users had to compile their own playlists to determine what they wanted to listen to. Of course, some users will continue to prefer this model, and we think Pandora may want to consider creating a competing service. Spotify also has an important relationship with Facebook (NASDAQ:FB), but we think Spotify still has a long way to go before it reaches the same adoption rate as Pandora.

We think the main driver of future earnings for Pandora (it's still putting up losses) will be a combination of more users and lower content costs. Compared to terrestrial radio and Sirius XM (NASDAQ:SIRI), content costs are quite high, but they could come down. And more users/listeners over time should drive up the price of advertisements. However, both of these factors have yet to occur in any meaningful way for Pandora to turn a profit. We view Pandora as a "show me" story, and the firm fails to meet the criteria to include in our actively-managed portfolios.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Some of the firms mentioned in this article may be included in our actively-managed portfolios.