Pandora’s Boombox: The Future of Internet Radio

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

The internet radio company Pandora  (NYSE: P) has enjoyed an enormous surge in popularity, and just reported strong fiscal year 2013 third quarter earnings.  Overshadowing this good news, however, is doubts about the future of the Oakland, California-based company and if it is/will continue to be a good investment.  Pandora is, overall, in a position of strength to compete in the global marketplace, but must answer the challenges of the impeding “fiscal cliff” and increasing competition from contenders in the industry.

Over the past several quarters, Pandora has more than doubled its quarterly revenue.  According to Pandora’s third quarter financial statements, Pandora raked in total revenues of $120.0 million, which is a 60% increase from 2011.  Advertising revenue for the company comprised $106.3 million of the total, while subscription fees and other miscellaneous revenues encompassed the remaining $13.7 million.  Total listener hours grew 67% to 3.56 billion hours for the third quarter of fiscal 2013, compared to 2.12 billion hours for the third quarter of fiscal 2012.  These are all good numbers for Pandora, but what exactly do they mean practically?

Pandora had a relatively good quarter.  They either matched or beat most analyst expectations.  Pandora now boasts a growing listener base of about 59 million consumers and is doing an excellent job of integrating into the mushrooming mobile marketplace.  Companies such as Facebook and Google (NASDAQ: GOOG), on the other hand, are struggling to monetize the mobile marketplace.  Since most of Pandora’s revenues are derived from advertising, Pandora is focusing on advertising for revenue growth, both in the short and long term.  These numbers generally mean that Pandora can stay on track for continued, sustainable growth for the near future – but there are several issues that could bring a potentially hazardous flipside which could upend Pandora’s “boombox."

The looming “fiscal cliff” remains a large factor of uncertainty for Pandora’s advertisers.  But it is by no means the only issue Pandora faces moving forward.

For example, Pandora faces stiff competition from tech powerhouses like Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT).  Apple has recently rolled out plans to challenge Pandora with its own internet radio services, while Microsoft has recently introduced the web radio service Xbox Music.  This competition is significant for Pandora, because while one can look at the situation at hand and simply blame the fiscal cliff for Pandora’s uneasy outlook, bigger underlying issues include the potential loss of advertising revenues and “fiscal turf” to Apple and Microsoft.  Pandora also faces competition from Sirius XM (NASDAQ: SIRI), as Sirius XM is planning on expanding into internet radio.

Another important topic to consider is the license royalty fees Pandora must pay.  As Pandora’s users listen to more and more of the company’s internet radio “stations,” Pandora must pay more money to the recording companies and artists in order to be able to continue licensing their music.  However, this is a concern for almost every similar internet radio company.  Pandora has therefore been lobbying Congress to pass a bill that would reduce the royalties it pays to recording artists and companies.

Admittedly, Pandora’s current price to earnings ratio (P/E ratio) is atrocious, with an astounding -41.09 P/E ratio.  The P/E ratio is important because it is a strong indicator for investor sentiments, although the ratio doesn’t tell the entire story in and of itself.  One must compare apples to apples across the same industry when looking at P/E ratios, and sky-high P/E numbers do not necessarily correlate to future success.  Also, Pandora’s low P/E ratio might actually be a market undervaluation of the company, so Pandora would have room to grow.  Sirius XM’s P/E ratio, for comparison, is at a respectable +5.41.

And, as previously mentioned, the fiscal cliff isn’t helping things very much, either.

So, what does the future hold in store for Pandora and internet radio as a whole?

The internet radio industry is blossoming.  Pandora has too much of a foothold in the marketplace to simply disappear altogether.  If worse comes to worse, Pandora will be potentially bought out by a more powerful company, such as Microsoft, Apple, or Google.  Economic worries might be a potential hazard to Pandora’s future growth, since internet radio is viewed as part of an entertainment budget slice for many families that can easily be cut in hard times.

You’ve got to give Pandora credit for its achievements.  According to a recent comScore report, Pandora is heading in the right direction.  Pandora’s offerings ranked 23rd across all platforms, and the company is still moving up the rankings.  Pandora, overall, while it does have rising royalty costs, competition, and economic worries to fret over, is in a position of strength and steady growth.  In order to be able to not only stay fiscally solvent but propel forward, the company needs to focus on growing its audience and monetizing usage well.  The company has done an excellent job of gaining revenue from the fast-growing mobile marketplace.  Pandora’s boombox will continue to send out reverberations across the internet radio industry for the near future.

EvanBuck has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. 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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