Is Google Play Music a Death Knell for Pandora (P) Stock?

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Google (GOOG, GOOGL) made its own streaming music service, Google Play Music, available for free on Tuesday, clearly trying to get a head start on Apple (AAPL) and its eponymous Apple Music streaming service.

Pandora P stock google play musicBy doing so, it may have inadvertently spelled the end for Pandora (P) stock in the process.

People have been calling for the downfall of Pandora stock for years now, but shares have only started to show serious weakness since early 2014. P stock is down 39% in the last year, cratering 55% from its February 2014 peak, and off about 2% since the start of the week.

Tuesday’s fall should have been worse than it was. Here’s why Google Play Music poses such a huge risk to the world’s largest publicly traded streaming music company.

Google Play Music: Almost Identical Features

Like Pandora, Google Play Music has both a free and a paid version. Also like Pandora, Google Play Music’s free version is ad-supported, available online and on Android (iOS is on its way), gives users a limited number of skips, and doesn’t allow for offline playback.

In short, it once again highlights the biggest threat to P stock: competition.

Consider the fact that Pandora is already struggling to turn a profit — it hasn’t been in the black on a GAAP basis in its five years as a public company — and you’ve got yourself a problem. Especially when the newest competitor is GOOG, whose services are absurdly ubiquitous: In 2014, the number of Android devices shipped exceeded 1 billion, and “Google” itself is shorthand for using internet search — to the dismay of Bing and all the other search engines out there.

With Spotify‘s rapid growth and the dawn of Apple Music upon us (it will release June 30, presumably with Taylor Swift’s catalog intact), it frankly looks like there are too many cooks in the table for Pandora stock to succeed.

What Pandora Bulls Will Say

Bulls will point to Pandora’s continued existence — and 2014’s admittedly impressive 40% revenue growth — as proof that P stock will be just fine. Of course that patently ignores the flip side of those arguments.

Sure, Pandora hasn’t been killed off yet, but it has never made a dime. And yes, growing revenue by 40% isn’t too shabby, but that figure was 99% just three years ago, and in 2015 it’s expected to be only 29%.

The only other resort for Pandora bulls is the recent acquisition of a traditional, small-town radio station in South Dakota, KXMZ-FM. Pandora intends to use the KXMZ-FM acquisition to argue that it’s now a “traditional” broadcaster rather than a digital one, saving it millions due to the higher royalty fees digital broadcasters are subject to.

The only problem is, even if Pandora were allowed to pay the lower royalty fees — which is by no means a given and will definitely involve a legal war — the lower rate still wouldn’t be enough to lift Pandora out of the red.

Digital broadcasters must pay 4% of revenue to songwriters and music publishers, while the rate is 1.7% for traditional broadcasters. At revenue of $920 million in 2014, the company managed to leave owners of P stock with over $30 million in losses. In reducing its expenses by 2.3% of its revenue, Pandora would save about $21 million — just enough to still lose $9 million.

And don’t think that 30% revenue growth will necessarily save P stock. Revenues have more than doubled since 2013, yet the bottom line remains in the red.

But remember, this is all assuming Pandora can avoid the higher royalty fees, which is no sure bet. Those economics aren’t getting any better when you add Google Play Music to the long list of major competitors Pandora faces.

Sell Pandora stock while people still think the company’s worth a few billion bucks — because that illusion won’t last long.

As of this writing, John Divine owns shares of GOOG stock, GOOGL stock, and AAPL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/pandora-p-stock-google-play-music/.

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