Pandora Media Inc (NYSE:P) is trading lower by 12% after posting its FQ2 earnings report. While the stock has doubled in 2013, and expectations were high, is the loss warranted, and is Pandora Media Inc (NYSE:P) a post-earnings buy?
What was in the quarter?
I've never been too high on Pandora Media Inc (NYSE:P), but as I gazed upon their numbers and read the quarterly report, I couldn't help but to like their direction.
First off, revenue grew 58% year over year to $162 million and they posted an EPS of $0.04, both beating expectations. However, the weakness in shares was due to EPS guidance that was slightly below the consensus, and their decision to remove a 40-hour monthly mobile listening cap for free listeners.
Aside from top and bottom line performance, I found Pandora Media Inc (NYSE:P)'s content acquisition cost and its RPM to be very impressive.
The content acquisition cost is self-explanatory, showing how much Pandora pays for its content. In the quarter, it rose just 35% year-over-year. Back in FQ4 (two quarters ago) content costs were rising at 75% year-over-year. The 35% increase is a huge move in the right direction. Moreover, Pandora's content is its highest overall cost, and I find it encouraging that revenue is outperforming this one cost.
RPM is the amount of ad revenue that Pandora creates per 1,000 hours of listening. Back in FQ1, the RPM was $25.31 for mobile, which was up 34% year-over-year. But for the most recent quarter, RPM jumped to $33.9, a significant acceleration, and a 53% rise over the previous year. This shows that Pandora is earning more money for its services.
While these facts are all encouraging, there's another reason that I like the direction of Pandora.
What's To Like?
As Pandora moves into vehicles, the comparison of it and Sirius XM Radio Inc (NASDAQ:SIRI) becomes more legit.
Back in June, Pandora Media Inc (NYSE:P) disclosed that its services were in 2.5 million cars, more than 100 models. According to Bloomberg, the local radio advertising market is valued at $15 billion annually, which is a space that Pandora had no presence in years prior.
Pandora's 2.5 million car users is a long way from reaching Sirius XM Radio Inc (NASDAQ:SIRI)'s 25 million subscribers. However, Sirius has been the sole player in this space, but now faces the competition of Pandora, and we could find that Pandora steals significant share.
This brings me to my next point, with full-year revenue guidance of just $650 million, Pandora is still relatively small considering the size of its mobile, PC, and now auto market. On the other hand, Sirius has continued to grow as U.S. auto sales have exploded during the last four years. Yet, its year-over-year revenue growth is just 12% (last quarter), far below that of Pandora.
Despite Pandora growing five times faster than Sirius, Pandora Media Inc (NYSE:P) trades at 7 times sales and Sirius has a price/sales of 6.3. Therefore, both are valued similarly, although Sirius is highly profitable and Pandora is not. However, Pandora is entering a multi-billion dollar industry while Sirius faces a new competitor in its space. Hence, I believe that Pandora presents the better value and is cheaper relative to growth.