Apple's Upcoming Radio Appearance Wreaks Havoc for This Company

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

I love Pandora (NYSE: P), I listen to their service every day on my Android phone, and as I like to invest in companies whose products I enjoy, I thought it would be useful to do an analysis of the company’s stock, for both myself and all you readers out there.

Strengths

Has 62.4 million listeners. No competitor can undo that quickly.

Recently announced expansion into Australia and New Zealand, where royalty rates will be much lower than the United States, allowing the company to generate a profit there.

Brought personalization to radio. The more you interact with the service, the more it can predict what you will like, and the more you will use it. It is a radio "game changer."

Weaknesses

At the mercy of record companies and artists regarding royalties. Interestingly, terrestrial broadcast radio pays no royalties to artists, as at the industry’s outset it was considered the best way for artists to gain notoriety and recognition. My guess is this will change shortly, as they no longer have a monopoly on promotion.

Failure rate of digital music companies amongst the highest in any field.

Pandora doesn’t have the resources to compete effectively against bigger players. (enter Google, see below for more)

Still expected to lose 15 cents a share in 2013.

Mobile ad revenue per thousand, is less than 50% (per thousand exposures) of what it gets from desktop listeners.

Didn’t give encouraging guidance to analysts for upcoming quarter.

Opportunities

Google (NASDAQ: GOOG) doesn’t feel the need to build from the ground up (for example, its $6 billion offer for Groupon before it went public) and only after being spurned did it develop Google Offers. I truly believe that with Pandora’s recent devaluation that this is a prime takeover candidate for Google, as Pandora will give Big G millions of loyal listeners, and Google has the traffic to instantly flood Pandora with millions more.

The company is attempting to pass the Internet Radio Fairness Act, which would reduce the royalties that Internet radio operators pay to owners of the sound recordings that are the foundation of their businesses because they claim the fees they are required to pay by the Copyright Royalty Board make their business models unprofitable.”

As Google and Facebook grapple with monetizing mobile, this should have positive effects for all mobile players, Pandora included. The “trickle down” theory of sorts.

According to this Motley Fool column, Sirius XM (NASDAQ: SIRI) would also be an ideal suitor for Pandora. (Though I personally think Google is much better and more likely)

Threats

Apple (NASDAQ: AAPL) is rumored to be in the process of creating its own version of Pandora. It would be a synergistic addition to Apple's offering to its high-end users of its iPhone, and an excellent way to get iTunes more exposure, adding strongly to its existing ecosystem. If any company were to negotiate a better royalty fee schedule than Pandora has, it would be Apple. This is a huge, huge threat to Pandora.

Spotify is fast catching up, with 20 million listeners, and 5 million paid subscribers.

According to this column on the Motley Fool, “Pandora's management blamed weak fourth quarter guidance partly on the fiscal cliff, which is causing advertiser caution.” I list this under threats, because somehow based on this weak excuse, I have my doubts about management, specifically how they might try to spin other less than pleasurable events.

Recently a judge issued a ruling in the Augme Technologies versus Pandora in a patent infringement case Markman ruling which “determine what claim language the jury will hear when determining infringement.” This trial was disclosed early on as material by Pandora as it chose to “disclose it in their original S-1 filing prior to going public.”

Bottom Line

This is one of those cases, where even though I love using the company’s product, upon further investigation, I don’t believe it to be sound investment, unless I am betting on a takeover of the company, which as I have stated, is more than possible. I think I will keep it simple and stay on the sidelines. That said, I wouldn’t short the stock.

Lastly, I would recommend this article by Rocco Pendola for an interesting take on the company.                                                                                                                            

 


margiecfl has long positions in Google and Apple. 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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