The Street’s Rocco Pendola has written a unique, albeit implausible, defense of Pandora in the face of an imminent Apple onslaught.
Pendola argues that if iRadio is successful in pulling listeners from Pandora, it will be a positive for the stock. To date, Pandora has struggled to turn a profit, largely because its massive base of listeners amounts to an equally massive stream of royalty payments.
If fewer people use the service, Pandora could finally see profitability, as its royalty obligations would fall.
While Pandora may find temporary profitability, it’s not a value play. It’s an unprofitable business that has been carried by its investors largely because they believe that — one day — the company will be able to realize its dream of being the center of radio.
If Pandora starts to see meaningful subscriber loss, the company will be crushed. It will finally validate Pandora’s bears, many of whom have long argued that the company was greatly exposed to rising competition.
An Android savior?
Of course, if Pandora’s business is no longer viable on iDevices, it could fall back on Google’s Android. That might not be so bad, given that Android is the most popular smartphone operating system in the US.
That said, there are still plenty of competitors on the Android platform. There’s the aforementioned Spotify and Rhapsody, Slacker Radio, and Rdio, not to mention the fact that more are coming — Dr. Dre is planning to launch his own service later this year.
Google’s own recently launched service is tightly integrated with the Android player, but requires a subscription. Those unwilling to pay the monthly fee aren’t going to abandon Pandora for it, but because it includes Pandora-like radio functionality, subscribers to it have no reason to go back to Pandora.
No hope for Pandora
To recap, Pandora is an unprofitable business, beset by numerous competitors. Increasingly, these competitors are owned and directly integrated into the mobile devices used to access Pandora.
Why would anyone view Pandora as a viable long-term investment? Granted, if Apple’s iRadio is not as advertised, or is delayed still longer, Pandora shares will likely see a short-term rally, in particular because it has a fairly high short interest (over 20%).
But in the long-run, the company’s future appears to be hopeless.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google.
The article Apple’s iRadio Will Crush Pandora originally appeared on Fool.com.
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