Pandora (P) stock has been on quite the roller coaster so far in 2015. Between late February and late May, shares went from just under $15 to just under $20. Then a downward turn erased all those gains … and then some.
And now? You guessed it. Pandora stock is on its way back up again. The catalyst for this latest bout of upwards momentum was second-quarter earnings, which is a bit surprising considering it has been a rocky earnings season for lots of big tech names like Twitter (TWTR) and Yelp (YELP).
During the most recent quarter, Pandora earnings talled 5 cents per share — more than double the analyst consensus of 2 cents per share — on the back of a 30% year-over-year increase in quarterly revenue. CEO Brian McAndrews attributed the strength to the fact that the company’s advertising investments have been paying off.
Lots of other metrics were thrown out as investors applauded Pandora stock higher, including mobile revenue and listening hours.
But in my opinion, investors are zooming in too much on this most recent earnings beat and missing the big picture.
Remember: Pandora has been public since 2011 and has a market cap approaching $4 billion. Put another way, its advertising income probably should have been figured out a while ago instead of being ironed out years after its IPO.
Ideally, the company would have gone public with a long-term business model in place. Instead, it’s slated to post earnings of 19 cents per share this year (putting the current pricetag for Pandora stock at over 93 times earnings) on the back of almost $1.2 billion in sales. Even the “impressive” expansion to earnings of 41 cents per share in 2016 leaves us with shrugworthy margins and shares trading at a forward multiple of 43.
Not to mention that those razor-thin margins could be crimped in coming years considering artist royalties are only going to increase — or that the monetization may not last.
Pandora is built the “discovery” music delivery model — one that is archaic and extremely vulnerable. Competition is heating up thanks to true on-demand streaming services (many of which come with a discovery component as well) from public and private competitors. Just a quick sample includes the seemingly endless terrestrial radio options, Sirius XM (SIRI), Google’s (GOOG, GOOGL) YouTube, the debut of Apple (AAPL) Music and Spotify.
Those are just the big fish, too. The music space is, to a large degree, what started the entire tech boom … so music startups trying to make music discovery and on-demand listening better are everywhere you turn.
Add it all up, and Pandora feels like the second coming of TiVo (TIVO) — a stock that’s lost a quarter of its value over the last month. The slow road to monetization combined with the quick pace of competition means that Pandora a bit of a dinosaur before it’s even found a long-term revenue model — and it makes me very cautious about Pandora stock.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
