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Earnings Preview: Survey Says Pandora Has A Tough Road Ahead

Many high flying stocks have come down to earth after earnings this quarter. The market seems to not have any tolerance for companies that sacrifice earnings for higher revenues and higher investment in its business.

Stocks that have come under fire for these practices after earnings are:

1. Amazon (NASDAQ:AMZN): Down over 10% after earnings
2. Salesforce (NYSE:CRM): Down over 10% after earnings.
3. Youku (NYSE:YOKU): Down over 10% after earnings.
4. Open Table (NASDAQ:OPEN): Down 8% after earnings.
5. Green Mountain (NASDAQ:GMCR): Down over 20% after earnings.
6. Netflix (NASDAQ:NFLX): Down over 30% after earnings.

It's because of this that I thought Pandora (NYSE:P) might suffer the same fate since it's in the same category. Its earnings will be reported after the market closes on 11/22. I wanted to get deeper information on the company before I made any decision. I conducted a survey with random people in my social circle regarding Pandora without saying whether I was bullish or bearish on the stock. If anything, I acted like I was positive on Pandora. Soon enough, I found that there was a strong theme to the survey, and that was..."Spotify, Spotify, Spotify!"

The following are some responses from 14 people who live in the New York City area when asked if they use Pandora and like it (in no particular order).

1. 65 year old male: "I think Pandora is toast. I don't use it at all anymore, I moved to Spotify about a month ago. (Is it easy to use?) It's very easy. You know, it's (Spotify) not a new service, its been in Europe for many years, it's just new to the United States."

2. 30 year old male: "I think Pandora will do well. All the other internet radio sites say "it's like Pandora" when talking about their features. That means Pandora is the one to beat."

3. 25 year old female: "No, I usually just purchase and download songs to my ipod."

4. 37 year old male: "No, I generally don't listen to music."

5. 27 year old male: "I tell my friends to use Spotify. Pandora has been around for awhile and is now on its way out. There are plenty of other "create your own station" programs out now, Pandora doesn't do anything special."

6. 35 year old male who works at a radio station: I asked if he used Pandora, he said "yea". When I asked what he thinks is the best internet music program, he said without hesitation: "Spotify."

7. 26 year old male: "I pretty much only use Pandora. I can jailbreak your iPhone and that will give you free unlimited Pandora music with no ads."

8. 65 year old male: "No I don't use Pandora or internet radio. I don't personally know anyone who does, no one has mentioned Pandora to me. One thing I hear mentioned a lot on the radio station I listen to in my car is Spotify, that seems to be the next internet radio big thing."

9. 23 year old male: "I mostly listen to Spotify, but sometimes Pandora. I listen to Pandora about twice a week. I think Pandora's ads are pretty good, better than most online advertising."

10. 31 year old male: "I used to use Pandora, but because they repeat the same songs over and over, I use iHeartRadio when I workout. See" (and he showed me the app on his Android). When I asked him if he used the "create your own station" feature it has like Pandora, he said "no" he's never tried it.

11. 27 year old male: "I don't use it much, but my co-worker listens to it all day at work. Why do you ask, are you looking to start your own internet radio site? I know this guy who is creating one."

12. 32 year old male: "As a musician who records frequently and is actively a part of whats left of the recording industry I feel like I can answer these questions well. I never listen to pandora anymore but used to when it first came out and it was the only website of its kind.  I'd put it on when guests came over cause it kept streaming the tunes without me having to keep running back to the computer and youtubing something new.  Now with playlists that's not a problem though. I listen to music off youtube cause there's many versions of songs to choose from, great playlists already made up, it's free and if you want you can watch a visual with the song too. Bottom line is it's just not that hard to imitate what Pandora does.  Most of the people I know use Youtube, Grooveshark or Spotifi.

13. 35 year old female: "I don't use Pandora, I listen to my playlists on Youtube."

14. 67 year old female: "Hmmm, Pandora, yea I think I've heard of that. No, I don't use it or know anyone who has, but I'm older, you should probably ask my daughter. (But you use Netflix right?) Yes, I use Netflix and listen to the radio."

15. 31 year old male (a DJ): 
Pandora is super rad..not sure on the ratings. Other big name internet radio stations for Electronic Music are Digitally Imported dot com, Proton Radio dot com, Frisky Radio dot com, Pure dot fm, the radio stations listed however do not have the super functionality that Pandora has.  

From Employees Point Of View

Looking at, I saw some comments from Pandora current and previous employees. Now, granted most employees who post on Glassdoor are disgruntled, these comments are not the right kind of disgruntled for a shareholder. A shareholder would like to see: "too much pressure, pay too little, too many hours" kind of complaints. Not too many of the complaints are in that direction. Here are some tidbits from, Pandora company reviews:

Past employee (posted May 9, 2011): "Pandora has a non-existant company culture.There is also a general sense of dysfunction due to "growing pains." The company hasn't scaled key departments in a functional way that serves employees in the the ways that they should, specifically HR. They've also made some bad, incompetent hires in key roles."

Current employee (Oct 7, 2011): "The other review mentioning that there is no company culture is spot on. If there used to be one, its gone. Upper management is indeed disconnected, and many of the upper management staff are engaged in full-on turf wars that are hurting the company's growth and employee moral.
If Pandora lasts through 2013 without going out of business, getting acquired, or completely changing their business model, I'll be astounded."

Past employee (Sept 11, 2011): "Upper management and the sales organization is completely unorganized. The company has no solid long-term vision and lacks in initiatives to get to profiitbility. Some of the maagement is just rude. They just want to be the cool company rather than be professionals and have drive to get to profibility."

The bottom line is that these employees feel that Pandora isn't organized and isn't driven by profits. This isn't a good thing for a company, and the stock market currently has no tolerance for companies that don't respect the bottom line. Dividend stocks are the most popular now. During a bull market like the dot com boom investors didn't care about profits because they were looking into getting rich in the future. Now, with investors struggling, they are looking to find returns in the now.

Ad Quality

Another aspect an investor needs to look at is quality of ads. Pandora must pay a tenth of a penny in royalties for every song played. Office workers who spend all day working and listening to Pandora might not be the best ad listeners because they aren't giving them their full attention. They're probably tuning the ads out.  Also, the vast majority of Pandora's audience is between the ages of 15 and 35. That demographic has less spending money than the older crowd.

Pandora's CEO, Joe Kennedy, recently said he wants "fair share" of radio ad dollars. Based on what was sold last quarter, Pandora should get double the ad dollars compared to the rest of radio advertising based on the amount of listening time. What I think is missing in the puzzle, is talk radio has a personal connection to its listening audience, unlike simply the stream of music that Pandora plays. Also, talk radio is someone talking, not singing, so it's easier for a listener to transition to a regular ad with more talking. What's interesting is Pandora said in its blog during its Milwaukee Town Hall meeting, is it's trying to get its customers to interact with the ads and show their favorite ads, bookmark them, etc. This is an attempt to try and get them to respond to the ads more, I'm not sure if Pandora is having wishful thinking or being more innovative here.


After my surveys and deep analysis, I have come to the conclusion that Pandora deserves a short position. This isn't a screaming short, because it is possible that internet radio will continue to grow and Pandora will reap the benefits being the leader in the space. Regardless of whether Pandora has a good earnings or not, long term it isn't making enough revenue and profits to justify an over $2 billion market cap. To do that, it must expand internationally, but that will be expensive. Netflix (NFLX) is attempting to go international and is facing many challenges and heavy costs in doing so.

Furthermore, it's predictable that P will take a dive immediately after the lockup period ends on December 12th. LinkedIn shareholders just recently went through some pain after its lockup period ended. So whether Pandora beats on earnings or not, there's still a threat there.

Disclosure: I am short P.