Pandora: Reasons to Believe
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I've been a fan of Pandora (NYSE: P) almost since it launched. As a music fan, it was a dream come true: an online radio station that was completely customized to my tastes. Since my listening habits are often way outside the Top 40, that's pretty impressive.
Pandora's moat is the way it serves up music to listeners, whether on the desktop or mobile. It comes out of the earlier Music Genome Project, which attempted to break down music into 400 elements, based on tonality, rhythm, and other attributes.
The company posted a net loss of $5.4 million or ($0.03) per share in the second quarter, even as revenues beat estimates by 100 percent, according to Yahoo Finance. Sales were $101.3 million, up 51 percent year-over-year. Most of that came from advertising, with $89.3 million in ad sales, the rest coming from premium subscriptions. Pandora's non-GAAP measures have the company breaking even.
The company's greatest costs come from the music itself, with $60.5 million of the company's total $106 million going toward content acquisition. Streaming radio stations have to pay royalties to the record companies every time they play a song. With a listener base of 54.9 million active listeners streaming 3.30 billion hours of music, you can see how that adds up. Terrestrial radio stations simply have blanket licenses from BMI and ASCAP.
Pandora seems to have figured out online advertising, as the company's growth in ad sales shows. Ads plaster the screen of the free tier of the service, and there are also audio and video ads that play periodically after a few songs, when the user skips a song or when the user changes stations. Personalized music also means personalized ads, which is why major advertisers have been flocking to Pandora, as the earnings conference call reported.
Pandora also has the opportunity to dig a moat with the ability to target both the desktop and mobile devices. The company claims an 86 percent year-over-year growth of mobile revenue, raking in $59.2 billion in the second quarter. Pandora also just launched a new version of its Android app.
Sirius XM (NASDAQ: SIRI) had second quarter earnings posted a profit of $3.1 billion or $0.48 per share, beating estimates by 2,300 percent, even as sales dipped slightly to $767.67 million from $804.72 in the first quarter. Sirius differs from Pandora by having no ads but instead from subscriptions, mainly by people using the service in their cars.
Liberty Media (NASDAQ: STRZA) has been aggressively pursuing its stake in Sirius, boosting its stake by 48 percent. Liberty hauled in a profit of $156 million dollars last quarter. With the difference in between the net profits in the two companies it's not surprising that Liberty wants Sirius so badly. Liberty posted a profit of $156 million with sales of $281.04 million.
Cumulus Media (NASDAQ: CMLS) is the next major competitor, with 504 AM and FM stations in 120 markets in the Continental U.S. It posted a third-quarter profit of 8.14 million, with sales of $80.78 million, which is less than Pandora's ad revenue.
Pandora beating Cumulus's ad revenues means it's encroaching on traditional radio. Radio station formats are tightly controlled, and it's really hard to get excited about them. Even satellite radio, with its many choices, still adheres strictly to formats. Pandora's customized playlists make it a much more personal medium with more personal ads. The only problem is its negative cash flow, but the record labels are largely responsible for that. I'd wait a couple of quarters to see if Pandora can actually attract enough revenue to stay consistently profitable, though.
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