Trends for royalty payments by streaming companies are headed down, which of course bodes well for Pandora’s long term prospects. Assuming revenue growth continuing aggressively out to mid-decade, this is a stock that has the potential to double or more over the next few years as it becomes sustainably profitable, but with no history as yet, Pandora is only suitable to investors who can afford to take risks.
Of course, in a field that is growing as rapidly as digital, downloadable music, there should be room for veterans. One such company is The Singing Machine Company (SMDM). This company has been around for 30 years and is best known for manufacturing children’s’ karaoke machines. At the recent Las Vegas Consumer Electronics Show, the company introduced a new line of grown up “party machines” that stream 1,000’s of songs from the internet and also act as wireless Bluetooth speakers. The products, sold at retailers such as Costco Wholesale Corporation (NASDAQ:COST), Target Corporation (NYSE:TGT) and Toys R Us, are also sold online through Amazon and other websites.
The company’s debt ballooned to $5.7 million in fiscal 2011, but was able to reduce its debt down to $4.3 million in fiscal 2012. In fiscal 2012, the company posted nearly $600,000 in profit. Sales jumped 30% (due to the addition of new distribution channels (Target and BJ’s Wholesale Club). Expenses were stable, while margins improved slightly. The company reported a 90% sell through number, meaning that it sold 90 of every 100 shelved units. Online sales (Amazon.com and Walmart.com) rose significantly throughout 2012. On top of this, the company maxed out its warehouse capacity in 2012, especially during the holiday season. The company plans to reevaluate its systems processes to keep up with expected demand from the 2013 holiday season.
The company expects its debt will continue to decrease in 2013. I expect the company to show very strong numbers in its next earnings release. With this increased profitability, the company will have more cash available to pay down its debt. With well-established retail channels and new and exciting product, I am certain that in the quarters ahead The Singing Machine Company will generate enough cash to continue paying down its burdensome debt, paving the way for more consistent profitability. For those in a position to take substantial risk, The Singing Machine Company could well provide solid returns over the next few years if household incomes do not collapse.
The article Firms Using Music Downloading And Streaming To Become More Profitable originally appeared on Fool.com and is written by Maxwell Fisher.
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