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Shares of Pandora Media (P) rose almost 6% over the past trading week. The company reported a decent set of July listening numbers.

July Listener Hours

Pandora reported 1.12 billion listener hours for July, up 76% compared to last year's 637 million hours. The numbers are up almost 4% compared to June's 1.08 billion hours. At the same time the market share for the US radio rose from 3.51% last year to 6.13% in July of 2012. Pandora's market share rose by 15 basis points compared to June. In total it now has 54.9 million active listeners, up 48% on the year.

First Quarter Results

In May, Pandora reported first quarter 2013 revenues of $80.8 million, up 58% compared to last year. Advertising revenues rose 62% to $70.6 million, while subscription and other revenues increased 38% to $10.2 million. The company reported a net loss of $20.2 million, or $0.12 per share on a GAAP basis.

The company reported 51.9 million active users, up 53% compared to last year. The number of listening hours rose 92% to 3.09 billion for the first quarter. The market share rose from 3.11% to 5.95%.

CEO and Chairman Joe Kennedy commented on the results, "Pandora is off to an excellent start, exceeding our first quarter outlook and raising our expectations for the full fiscal year. Consumers continue to embrace Pandora's unparalleled personalized radio experience at an extraordinary rate, propelling Pandora's market leadership."

Outlook

Pandora anticipates second quarter revenues of $99-$101 million. It anticipates non-GAAP net losses of $0.03-$0.05 per share.

For the full year of its fiscal 2013, the company anticipates revenues of $420-$427 million. Non-GAAP losses are anticipated at $0.07-$0.11 per share. Analysts expected the company to guide for $416 million in revenues and a loss of $0.16 per share.

Valuation

Pandora ended its first quarter with $80.6 million in cash, equivalents and short term investments. Full year revenues are anticipated around $425 million for its fiscal 2013, on which it expects to lose $0.07-$0.11 per share. The guidance implies that the company expects to be profitable in the second half of 2013.

Currently, Pandora is valued at $1.68 billion. Excluding the net cash position, the operating assets are valued at $1.6 billion. This values Pandora at 3.8 times annual revenues. This valuation compares to a revenue multiple of 3.1 times for Sirius XM Radio (SIRI).

Currently, Pandora does not pay a dividend.

Investment Thesis

Shares of Pandora went public at $16 per share, little over a year ago. Shares peaked at $20 in the weeks following the offering, but ever since drifted downwards to $10 in the beginning of this year.

Shares recovered to $15 during spring of this year, in anticipation of its first quarter results. Shares fell to lows of $8 in April amidst worries about increased competition, and a stagnation in market share gains. Furthermore, investors worry about the cash levels of the company. At its current rate, the company will run out of cash in a year time. Fortunately, the company's guidance implies that it will roughly break even, or manage to squeeze out a small profit in the second half of the year.

At the same time other internet based music and radio companies are becoming bigger competitors. Spotify, raised $100 million last year at a valuation of $1 billion. The company now has 10 million subscribers, of which 3 million have a paid subscription. Although it is still much smaller in terms of audience numbers, it now has similar financial resources.

Growth is not Pandora's issue. However its business model is not well-defined, and the shaky financial position might become an issue later this year. Last year, the company spend roughly half of its revenues on music royalty payments, according to executives. The company's founder Westergren is actively lobbying to change the royalty rules. Instead of paying an a fixed royalty per song, he wants to pay a percentage made on the profits made from the songs. Such an arrangement would be similar to other branches of the entertainment industry, including movies. Essentially, such a switch would transform Pandora's business model from fixed costs into variable costs.

I am hesitant to initiate a long position at this moment. While I am impressed with the growth results, I am not convinced by the company's business model. Furthermore the competitive landscape can change very rapidly.

Until I am sure that the company does not need to raise new cash in a dilutive offering, or is able to change the royalty scheme, I will stay in the sidelines.

Source: Pandora - Too Many Uncertainties Regarding Its Earnings Model