Who says you can’t monetize mobile?
In the fourth quarter, Pandora (NYSE:P) did just that, as mobile revenues spiked by 111% to $80.3 million, which was higher than the mobile listening hour growth of 70%. For the full-year, the revenues gained a sizzling 105% to $255.9 million compared to listener hour growth of 89% during the same period.
But of course, Pandora is much more than just mobile. The company still has a thriving web business and has been moving into other connected platforms, including cars.
As a result, the overall Q4 revenues were strong, jumping up 54% to $125.1 million, which beat the Wall Street estimate of $122.8 million. The net loss came to 4 cents a share, which was better than the consensus estimate of 5 cents a share.
Plus, it looks like the momentum will continue. For Q1, Pandora is expecting revenues of $120 million to $125 million — above the consensus was for $118.6 million.
On the news, shares of Pandora soared to a new 52-week high. By mid-morning, the gains were still around 15% even though the company’s CEO Joe Kennedy has announced plans to leave the company once there is a replacement for him. Kennedy joined the company about nine years ago and was instrumental in building Pandora.
Of course, the real question is whether you should you pile into the stock. Let’s take a look.
For the most part, Pandora has turned into a powerful force in the music industry. The latest quarter saw a 53% increase in total listener hours to over 4 billion, which puts its market share of the US radio market at over 8%.
With this platform — as well as with heavy investments in building out a strong sales force — Pandora has become very attractive to advertisers. The mobile format allows for better targeting and improved local offers. More importantly, it looks like more and more advertisers are starting to understand these advantages.
No doubt, the market opportunity is massive. Keep in mind that the traditional radio ad market is about $15 billion per year.
Still, investors should be worried that Pandora still can’t make money despite the fact that it’s been around for about 13 years. True, the company is focused on growth. But then again, so are operators like Facebook (NASDAQ:FB) and LinkedIn (NYSE:LNKD) and they manage to crank out profits.
As for Pandora, it has one big structural issue that could make it nearly impossible to generate earnings: licensing arrangements with the recording industry. Consider that these represented a whopping 61% of revenues in 2012, which left little room for the bottom line.
Plus, it looks like the recording industry will continue to fight hard to get a big cut. And let’s face it, they have lots of leverage since quality content is what users really care about.
And that’s not all; the mega tech operators are eying the streaming market too. For example, Google (NASDAQ:GOOG) is currently locking up content for its own service and Apple (NASDAQ:AAPL) is doing the same. The good news is that Apple’s radio product has hit some snags and its own offering may not hit the market until later in the year.
But that’s a short-term break, not a long-term solution … and these large companies can leverage their huge customer bases, marketing resources and mobile platforms. In other words, they are likely to put considerable pressure on Pandora.
The Bottom Line
So, while it may be tempting to jump into the stock, investors should hold back and wait for the hype to subside. Besides, it seems that part of the spike in the stock is from a short squeeze. Keep in mind that a staggering 61% of the float was in short positions!
Again, there’s little doubt that Pandora has a great service and brand. Its platform is also ideal for advertisers who want to target a rapidly growing mobile audience. But Pandora will likely have a tough time getting to profitability and the competition will remain a problem.
All in all, investors should stay away from the stock for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.