Pandora's Box: What Will Earnings Unleash?

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

I’m taking a look at stocks that are due to report quarterly earnings in the next week.  Though I don’t own Pandora (NYSE: P), I’ve used their service for years and enjoy having several custom radio stations just for me.  Pandora appeals to folks of all ages, including my 20 year old daughter and my 60 year old neighbor. 

The Pandora business model is an interesting one.  Although it is not yet a profitable company, I believe it has the potential to be very successful within the next few years.

What I’m Looking For:

Pandora is expecting to release its quarterly results on Tuesday, December 4.  Here are some of the things I’ll be looking for when I review the 10Q:

  • Pandora defines its Inventory as “listener hours” segmented into demographic units.  In the past few quarters, “millions of listener hours” have increased 80% plus, though the growth appears to be slowing.   I’ll be looking for Pandora to maintain that growth and for listener hours to be at or above 4.3 million for the third quarter.
  • Pandora earns the majority of its income selling its “inventory” to advertising companies.  Advertising revenue has been lagging the growth in listener hours and appears to be due for a bump.  I’m looking for a YOY increase in advertising revenue of at least 55% to around $100 million.
  • Pandora earns a smaller percentage of its revenue from subscriptions to its service.  These are people like my neighbor who want their music but don’t want to listen to advertising.  They are willing to pay a nominal amount every month to opt out of those advertisements.  I’m looking for YOY subscriber revenue to increase around 30% to about $16 million.
  • As a sign of overall health of the Pandora, I’ll also be looking for a continuing upturn in “Advertising Revenue per thousand Listener hours” using Mobile devices.  Because Pandora’s sale of advertising time lags the increase in listeners, especially as listeners migrate from their computers to their mobile devices, “Advertising Revenue per thousand Listener Hours” has necessarily declined.  I’d like to see this number stabilize above $21.

Longer Term:

  • Longer term, I’m looking for Pandora to develop new relationships with additional car manufacturers.  American consumers expect to receive entertainment in their new vehicles.  It will be good for consumers for there to be additional competition for satellite radio, bringing pricing down overall.  (Though not necessarily good news for SIRIUS XM. (NASDAQ: SIRI)  SIRIUS does not appear to be impacted yet from Pandora’s entry into this market.  Its Subscribers continue to increase at 7.5%+ per year since 2009.  I’m projecting that SIRIUS subscribers will have increased close to 9% for FY2012 compared to FY2011. )
  • Pandora warns in its 10K & 10Qs that it has been streaming comedy content since May 2011.  This comedy content is not eligible for licensing and is provided “absent a specific license from any such performing rights organization.”  Although it is paying royalties to SoundExchange for these works, it is possible that it could be ordered to cease this practice in the future.
  • I’ll also be keeping an eye on the US Judiciary Committee as they begin hearings on the Internet Radio Fairness Act.  The Committee will be taking a look at the 1998 Digital Millennium Copyright Act. In his written statement, Joe Kennedy, CEO of Pandora states: 
               “While Pandora and other Internet radio services compete directly with all of the other forms of radio for listeners in every place you find music – the home, the car, the office, on the go - we are subject to an astonishingly high royalty burden that is unique to Internet radio.”

Bottom Line:

Strictly looking at the numbers (revenue, net profit margin, etc.), I cannot recommend that anyone purchase Pandora as an investment today.  However, it’s a different story when you look at its business model and recent growth.  If Pandora is able to stabilize its expenses, and make more strides in selling advertising for listeners on mobile devices, I can see the stock trading in the $11 range within the next six to twelve months.

In any case, this is a stock we’ll watch to see how it fares in the next quarter and the Judiciary Committee.

GailPEddy has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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