Pandora Meida (P) is enjoying a favorable May, seeing its share price moving from $8.56 on May, 2012 to the last closing price of $11.79, representing an increase of 37.73%. The streaming music service provider is more and more popular with users, according to the latest statistics, the company has occupied 71.7% of the Internet radio market share in the United States, and currently has users of more than 150 million. The beautiful tune sounds great to investor, but is Pandora really a great stock to buy?
When we dig into the business model of the Internet radio provider and uncover the appearance of technology and Internet concept, we find the company actually relies on an old fashion business model: Hire local sales reps to find more advertisers. According to the latest earnings call, the company had hired 79% more sales reps than last year. Although the company has attracted some local advertisers through its so-called more targeted advertising platform, but the huge marketing budgets and high content cost are the factors should not be ignored.
Pandora reported revenues of $80.80 million for the first quarter of fiscal 2013 On May 23, representing an increase of 58% compared with the same period of the prior year and beating the consensus estimate of $6 million. Advertising revenue was a deafening sound for investors and it reached $70.6 million, up 62% compared with a year ago. Subscription and other revenue was $10.2 million, up 38% compared with the same period last year. In addition, mobile and device revenue now represents around 55 percent of total advertising revenue.
Net profit was $20.20 million, or 12 cents per share compared with $9.10 million, or 61 cents. This quarter Pandora averaged more than 50 million active users a month. Total listening time grew by 92% for the first quarter to about 3.09 billion hours compared to 1.6 billion hours a year earlier, hitting a new record of 5.95% in the total U.S. radio listening time.
To this place, we figure out the biggest problem of Pandora: The more users, the more losses. Pandora’s business seems only a buster on the revenue but not on the profit. In other words, Pandora burns more money when its customers use the service more. The company’s CFO Steve Cakebread explains the situation: “We expect negative cash flow from operations resulting primarily from increased listener hours and resulting content spend.”
The company pays license fees to content providers based on actual usage — and they’re exorbitant and rising. How long can this business be sustainable? So how does Pandora fix that problem? Unless it can attract more advertisers to enter, to offset part of the expenditures, or there will be no improvement in Pandora’s performance.
Pandora will probably continue to expand its user base in the remaining time of fiscal 2013. Pandora’s outlook is also encouraging. For the full year fiscal 2013, the company predicts total revenue will reach to $420 million to $427 million, up from the previous guidance of $410 million to $420 million.
Investors obviously appreciated the Q1 earnings report and good financial guidance as Pandora stock price has harvested a lot during the recent trading day. Some institutions also show modest optimism about Pandora. JMP Securities reiterated its market outperform rating on Pandora stock and raised its price target from $14 to $16. Meanwhile, Barclay’s raised its target by one dollar to $9.
In conclusion, given the current situation of Pandora, it is not a good opportunity to jump into the stock right now. Just as CEO Joe Kennedy had said that ad sales are doing well but it’ll take another year or so before ad revenues start rising faster than content costs. Until the company finally translates user-base into higher ad growth than costs or the company is able to invent a better way of attracting revenue, it is better for investors to wait and see what will happen and move their hands off the stock.