Pandora: Strengths, Weaknesses, Opportunities, and Threats

Cory is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After reporting reasonably positive earnings, Pandora’s (NYSE: P) share price was smacked down for flat revenue guidance through early 2013. Is one quarter of flat revenue growth a good reason for an 18% plunge, or is this a buy opportunity?

Discussions surrounding dynamic media providers like Pandora and Sirius XM (NASDAQ: SIRI) tend to be overheated and sometimes irrational. I find the best way to cut through the cloud of emotion surrounding a company like this is a SWOT analysis -- exhibiting its strengths, weaknesses, opportunities, and threats. Before getting started it’s important to note that Pandora reports a full month later than most other companies.

Strengths

  • Popularity is up. Listener hours are up 67% YOY. Market share of total U.S. radio was 6.55% up from 4.27% in Q3 2011.
  • Total mobile revenue was up 112% in Q3 2012, rising to $73.9 million from $34.9 million in Q3 2011. Mobile RPMs, or revenue per 1000 listener hours, was $26.96. Since, Pandora has to pay royalties on every song users listen to, this operating metric is extremely useful for gauging the company’s profitability.
  • Traditional and satellite radio can not begin to offer the level of targeting that Pandora’s unique service provides. Pandora ads are in many ways, an audio version of Google (NASDAQ: GOOG) Adwords.


Weaknesses

  • Near-term macroeconomic fears on behalf of advertisers have prompted them to revise guidance downward. In other words, if advertisers remain cautious heading into the fiscal cliff of doom, the company expects revenue growth will be flat in the quarter ending January 31, 2013.
  • Rapidly declining desktop usage is eating away at the modest gains made in mobile. Bigger ad space, bigger keyboards, and perceived security make traditional computer ads far more profitable. Unfortunately, for Pandora, fewer people are using the service on their desktops and notebooks every quarter.


Opportunities

  • Mobile monetization is on the rise. 77% of Pandora’s usage is on mobile devices. Traditional computer advertising RPMs were $55.18 for the trailing 12-month period ended October 31, 2011. Mobile ad RPMs are rising, but there is still a great deal of upside, provided they find a way to tap into it.
  • The Internet Radio Fairness Act would make the royalty rate that Pandora pays for every song its users listen to fall in line with rates paid by satellite providers like SiriusXM. Pandora currently shells out more than half of its revenues on royalties. Even a minor rate adjustment would put the company well in the black.


Threats

  • Royalty rights organization SoundExchange is waging war on the Internet Radio Fairness Act. It represents high-profile artists that would happily campaign against any congressman that supports the legislation.
  • Apple (NASDAQ: AAPL) is doing its best to launch a service to compete with Pandora. Luckily for Pandora, major US labels are not interested in offering the behemoth royalty rates lower than Pandora’s, at least for now.
  • Google has recently licensed 5.5 million songs in Europe, and is gunning for Pandora’s American users. It’s unlikely that content owners will be kinder to Google than Apple, but the rapid spread of Android devices is hard to ignore, even for US record labels.
  • SiriusXM is considering a more interactive service that helps expose users to artists they might not of otherwise heard -- the source of Pandora’s popularity -- to its paying customers. I know several people who have Sirius subscriptions as a result of new car promotions, spouses, and so on, that regularly listen to Pandora instead. They love the personalized experience Pandora provides. If Sirius can somehow match it, Pandora’s problems are just beginning.


Are you bubbling over with rage and excitement yet? That’s fine. Take a deep breath, count to ten, then let me know what I missed in the comments section below.


crenauer owns shares of Apple and Google. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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