In the second quarter, Pandora (NYSE:P) showed it can keep up the growth momentum. Revenue came to $101.3 million, up 51% over the past year, while the outlook remains robust. For the next quarter, the company expects revenues of $115 million to $118 million, which fits the Wall Street consensus of $115.4 million.
On the news, the shares are up 19% to $12 in today’s trading.
While social operators like Facebook (NASDAQ:FB) and Zynga (NASDAQ:ZNGA) struggle with their mobile efforts, Pandora has been faring much better. The revenues from the segment were $59.2 million, which was up a sizzling 86% for the past year.
Then again, Pandora has a key advantage as a radio service: Users are willing to listen to periodic audio commercials. There are also opportunities to target the advertising in terms of musical interests and a user’s geography, for example.
But of course, the key to Pandora’s success has been its well-designed apps for Apple’s (NASDAQ:AAPL) iPhone and Google’s (NASDAQ:GOOG) Android. This focus on innovation has certainly helped it deal with the fierce competition from operators like Spotify. It has also led to a loyal user base, which reached 55 million by the end of July.
Yet investors need to be cautious. First of all, a big part of the spike in Pandora’s stock price is a short squeeze. Consider that the short interest was about 28%. In other words, short sellers have been covering their positions, which has generated huge demand.
But perhaps the biggest issue for Pandora is its relationship with the recording industry. To stream its music, the company has to pay heavy licensing fees. As for the latest quarter, these costs increased by 79% to $60.5 million, which represents almost 60% of the overall sales!
No doubt, this is a heavy burden and makes it tough to sustain profitability. After all, Pandora posted a net loss of $5.4 million in the second quarter.
While Pandora has certainly built a great service and has made great strides in monetizing mobile, these efforts may not be enough. It really seems that the big winner is the recording industry, which gets a nice source of cash flows. But for Pandora’s investors, this will be mostly an onerous tax and probably make it tough for the stock to see long-term gains.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.