Can Pandora Media Inc (P) Stock Become More Than a Speculative Play?

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Like a broken record that skips, shares of Pandora Media Inc (NYSE:P) continue to frustrate investors, who wait patiently (I won’t say stubbornly) for the music streaming pioneer to prove that it can make money. But it does seems that P stock, which has bounced strongly from its 52-week low, is now ready to move higher. The question, though, is this yet another head fake?

Can Pandora Media Inc (P) Stock Become More Than a Speculative Play?Pandora stock has risen 7.7% in the last five day; however, the stock is still down almost 32% year-to-date, trailing the 8% rise in the S&P 500 index, the shares have nonetheless bounced strongly off its all-time and 52-week lows of $6.91, skyrocketing as much as 37% to a recent high of $9.31 on June 29.

Investors who bought P stock at the lows should be singing happy songs. But for everyone else, it’s been nothing but the blues.

P Stock: Playing Musical Chairs

For those who are thinking about taking a new position at current levels, there are tons of factors that need to be considered. Not the least of which is the potential effect of Sirius XM Holdings Inc. (NASDAQ:SIRI), which last month made a $480 million strategic investment in Pandora. The involvement of Sirius and Sirius majority owner Liberty SiriusXM Group (NASDAQ:LSXMA) gives Pandora the cash and stability it needs to operate.

There’s no question that Pandora — with active listeners of 76.7 million — boasts a solid user base. But Sirius’ involvement — by virtue of its 19% stake in Pandora — doesn’t immediately address the deficits Pandora still faces when it comes to competing with rival services such as Spotify and Apple Inc.’s (NASDAQ:AAPL) Apple Music. Not to mention Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) YouTube, which has become a top destination for music.

What’s more, it still remains to be seen what the company will look like in the next 12 to 18 months. On June 27, the company confirmed rumors that CEO Tim Westergren would be leaving the company he co-founded, while also leaving the company’s board of directors. Chief marketing officer Nick Bartle and president Mike Herring have also been shown the door. Naveen Chopra, Pandora’s Chief financial Officer, will assume the role CEO role until a permanent replacement is found.

Assessing Pandora’s Fundamentals

Profitability continues to be the company’s toughest challenge. While the company has delivered strong and steady revenue and subscriber growth over the last decade, profits have been non-existent. Not only have the company’s operating losses continued, Pandora’s operating expenses are now growing at a faster rate than revenues.

And it doesn’t appear as if this trend will soon change.

First-quarter gross margin fell 363 basis points year-over-year, owing to a combination of increased customer acquisition costs and advertising and subscription revenue. Meanwhile, revenue growth, which reached almost 20% in 2016, grew only 6% in the first quarter. Even more ominous is the fact that advertising revenue — the company’s bread-and-butter business — rose just 1% YOY even as subscribers grew 20% in the quarter. This combination suggests that the growing popularity of competing services from Spotify and Apple are eating Pandora’s lunch.

Looking ahead, the company will report second-quarter results in a couple weeks. Analysts expect a loss of 24 cents per share, wider than last year’s 12-cent loss, on revenue on the $368.95 million, up 7.6% YOY. For the full year, ending in December, analysts expect a loss of 51 cent per share, flat YOY, on revenue of $1.56 billion, up 12.9% YOY. Will these figures be enough to sustain this latest rally in Pandora stock?

Bottom Line for P Stock

Before jumping on a long Pandora position, investors, who have watched P stock plunged by some 80% from its 2014 high, should take total inventory of what’s ailing the company and make real projections on what the company can do to emerge profitable. While the recent capital injection by Sirius will extend Pandora’s lifeline, and help reduce pressures from music licensing fees, Pandora must nonetheless prove that its business model makes sense. Until then, any bet on P stock is speculative at best.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/pandora-media-inc-p-stock-speculative-play/.

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