Pandora’s (P) second-quarter results, reported July 23, proved the Internet radio company is thriving despite intensifying competition.
Pandora stock has responded to the results by rallying, and over the last six months, P stock is now up over 20%. Meanwhile, the Internet music streaming company has several other potential positive catalysts going forward.
Some have suggested that Pandora would be derailed by Spotify, and a number of people apparently believed that Apple’s (AAPL) Apple Music would kill P stock’s momentum.
But Pandora’s Q2 earnings (PDF) per share, excluding certain items, came in at 5 cents, versus analysts’ consensus estimate of 2 cents for the quarter ended June 30, and it reported revenue of $285 million, compared with the consensus outlook of $283 million. Moreover, Pandora’s ad rates surged 24% versus the same period a year earlier.
The elephant in the room, though, is Apple Music, which Pandora CEO Brian McAndrews said that his company had not yet seen any impact from Apple Music … because it only launched at the end of June.
But Pandora raised its fiscal 2015 guidance from a range of $1.16 billion to $1.18 billion to $1.175 billion, to $1.185 billion, providing further indication that Pandora isn’t threatened by Apple Music. Some investors in Pandora stock may have been upset that Pandora’s total listener hours increased just 5% year-over-year, but a 5% increase isn’t bad by any means for an already hugely popular service like Pandora.
Also, on Aug. 3, after traveling with Pandora’s management, research firm Piper Jaffray reported that Pandora will look to step up its listener marketing efforts in the second half of this year.
A Pandora’s Box of Catalysts
And Pandora stock has other major catalysts going forward. The company is poised to benefit from the rapid proliferation of connected cars capable of streaming its service.
The company has recently spent a great deal of money on upgrading its sales team, the benefits of which should show up in Pandora’s results sooner rather than later.
Additionally, Pandora’s collaboration with advertisers to give users an hour of ad-free music in exchange for interacting with a particular company’s ad of choice could do wonders for Pandora’s top and bottom lines. Advertisers could begin lining up at Pandora’s doorstep to shell over huge amounts of money for the guaranteed engagement.
Recently, I’ve noticed that Pandora begun streaming more ads from a few huge enterprises, including Ford (F) and Horizon Blue Cross Blue Shield of New Jersey. The fact that major advertisers are embracing Pandora certainly bodes well for the Internet radio company’s outlook.
Speaking of ads, 2016 is a major election year. Pandora could certainly obtain its share of political ads in late 2015 and 2016, as candidates look for innovative ways of reaching millennials.
A major overhang on P stock, however, has been a pending decision on the royalties it pays to stream music. The Copyright Royalty Board, a three-judge panel, is due to decide the issue later this year, and the representative of music-rights holders is seeking “a sizable increase” in the royalties.
However, Piper Jaffray believes that the two sides may settle. Jaffray’s believes Pandora could “adapt” to an adverse decision; Perhaps even by reinstating listening limits or charging a fee for lengthy listening sessions.
In any event, the example of Netflix (NFLX) suggests that Pandora should be able to reach a mutually beneficial deal with the holders of music rights. In all likelihood, the rights holders will not want to jeopardize the revenue stream they receive from Pandora by charging much higher rates.
But what’s most important is that Pandora’s results show that it is doing well despite the competition, and its many positive catalysts suggest that the performance of Pandora stock will improve going forward.
Although Pandora stock is up about 25% since last July, Pandora stock is barely above the levels it had reached at the end of May. So given Pandora’s multiple upcoming positive catalysts, P stock still has more room to run going forward.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
