Pandora Media Inc (P) will report earnings on April 28, and investors will be paying close attention to whether or not the company can grow revenue 24.1% to $286.5 million.
As usual, Pandora’s EPS will be at a loss, and with new music streaming services and aggressive marketing campaigns among competitors, the days of rapid listener and subscriber growth are long gone. Instead, P has become a monetization story, and how well it can monetize the mountains of data it has created and the large listener base it already owns will, in fact, dictate whether or not P stock is a good investment.
The Odds Are Stacked Against P Stock
This will be a very telling quarter for Pandora.
Not only do Spotify and Amazon.com, Inc.‘s (AMZN) Amazon Music remain major thorns in the side of Pandora, but Apple Inc. (AAPL) is completing a three-month promotion where it essentially gives away unlimited music to anyone who will try its new service, Apple Music.
To complicate matters even more, Pandora must weather a 15% hike in royalty rates to artists and music labels, while also navigating the sudden departure of CEO Brian McAndrews.
So clearly, the odds are stacked against P stock ahead of earnings, and its 50% losses over the last 12 months — nearly 30% this year — are indicative of such issues. However, because the odds are stacked against Pandora, and because of its stock losses, there is also the potential for P stock to move significantly higher after earnings.
Reasons for Optimism in Pandora
Since Pandora’s days of meaningful subscriber growth are over, investors will turn their attention to the moves that management has made to improve monetization and create new services.
Specifically, Pandora is trying to lessen its reliance on music obtained at Copyright Royalty Board rates that continue to rise, thereby putting pressure on costs and margins. In the past, Pandora’s future was tied to these rates, but the company has since worked out licensing deals with several music labels that give it more favorable terms. Such deals were nonexistent in the past.
Still, Pandora can’t very well sign favorable licensing deals with every big music label to improve its worsening position with royalty rates. Instead, the real catalyst that shareholders are watching is Pandora’s alternative revenue streams.
Pandora’s Artist Marketing Platform (AMP) is without question its most promising. This allows artists to market/advertise on Pandora to reach listeners who may be interested in their music, and who may ultimately pay for a live concert.
Fact is that no company has more music data than Pandora, thanks to years of likes and dislikes. Pandora can identify trends in a listener’s age, geographical location and past preferences to inform an artist who might like their music. It is a valuable resource, and holds true promise.
What to Expect
With all things considered, advertising is still the most meaningful form of revenue creation at Pandora. Ultimately, that has to change, and Pandora is still a ways from achieving such change.
However, at $9 per share, it is obvious that shareholders do not expect much from Pandora; they just want to see notable progress to suggest that AMP will in fact drive long-term performance.
Given the big changes in top roles at Pandora, coupled with the likelihood that Pandora cannot show enough change to combat pressure on listener growth, I would be very surprised to see a big move in P stock following earnings.
However, if P stock were to fall significantly, it might then be worth looking at, for investors who think Pandora will eventually develop these alternative revenue streams.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
