Should Investors Turn Up the Music?

By Ryan Guenette - September 6, 2012 | Tickers: FB, GOOG, P, SIRI, YHOO | 0 Comments

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On August 29^th, 2012 Pandora  (NYSE: P) reported second quarter financial results. The company displayed strong sales and raised its forecasts. The company crushed analyst estimates for revenues and earnings per share, causing the stock to rise nearly 15.00% in after hours, significantly inflated by short sellers covering their bets. CFO, Steve Cakebread, announced plans to leave the company during a conference call, stating that the reason for his resignation was not caused by any financial issues or disputes. Pandora is an internet radio service in the United States with 125 million registered users as of January 31^st, 2012. The company employs 530, and is valued at $1.68 billion on the New York Stock Exchange. After going public, the stock rose as far $20, before falling to its current price. So should investors turn up the music or turn it off?

“Catchy” Future

In 2012, the average analyst consensus believes the company will report earnings per share of -$0.19. In 2015, the street anticipates the company will derive $0.24 per share from its business operations. This represents a 226.32% increase in earnings per share over 3 years. During this same time period, Pandora’s sales increased 212.77%, representing that both Pandora’s top and bottom line are increasing, signaling a strong company. Pandora should continue to grow at accelerated rate into 2016 and 2017, which should further strengthen the company’s fundamentals. Even when cash flow is taken into account, Pandora is not set to become a profitable company until 2014. While Pandora is a company that is in the process of establishing its brand, it is not yet a company that is making money. Currently, Pandora does not pay out a dividend and has expressed no plans to do so in the future. From this we can see Pandora’s underlying financial growth on the top and bottom lines, yet observe the company’s gloomy profitability prospects and lack of dividend.

The chart below displays Pandora’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the foreseeable future.

Business Prospects & Outlook

Pandora’s services are customizable and enjoyed by millions of customers around the world. Their services allow the users to create their own personalized stations which play only the music they like. A teenager can listen to the hip hop and R&B station while his father listens to a station that plays hard rock. Users than can mark their favorite songs, and create playlists to buy on iTunes or Google. Their services are mobile and interactive, and are likely the future of music. The majority of Pandora’s revenue is from advertising on its desktop version, yet as mobile is becoming more and more popular, they will have to monetize their mobile platform if they are to flourish in the future. This is the same problem that faces Facebook, as advertisers are not willing to pay as much for a tiny advertisement on the side of the page on a smartphone screen, which is small to begin with. Pandora also derives a small amount of revenue by charging a fee for add free services. In conclusion, the more users Pandora captures, the more interest there will be from advertisers. The chart below displays the rapid increase in users and hours spent on Pandora.

All in all, if Pandora is able to monetize mobile, it will be a highly successful company in the future.

Who Tops the Chart?

Compared to some of Pandora’s most prominent competitors, such as: Google Incorporated (NASDAQ: GOOG), Sirius XM Radio Incorporated (NASDAQ: SIRI), Yahoo! Incorporated (NASDAQ: YHOO), and Facebook Incorporated (NASDAQ: FB), Pandora compares relatively in-line.

In terms of growth, Yahoo is the industry leader, while Facebook is the industry laggard. No companies in the industry pay out dividends. In the fundamental ratio comparison, Sirius Radio is the industry bargain, while Facebook trades at a huge premium to its peers. When growth is taken into account, Sirius is the industry bargain, while Facebook is trading at a huge premium to its peers. In the net profit margin comparison, Pandora loses money, while Facebook stands out to the upside.

The Foolish Bottom Line

Pandora has been on a rocky road since going public. The underwriters of the deal undeniably overvalued the interest and value of the company. Pandora possesses strong long-term fundamentals, but is not set to become profitable until 2014. The company does not pay out dividends, and has expressed no plans to do so in the future. If the company is able to monetize its mobile platform, the company will flourish into the future. Compared to its peers, Pandora is relatively in-line. While the company has recent been showing some signs of life, I am not willing to wait for the company to become profitable, when there are several companies with faster paces of growth with more certain futures. The foolish bottom line is that Pandora may offer long-term value to investors, but has too much uncertainty in its future. 

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