On Thursday evening, Pandora Media Inc (NYSE:P) posted its quarterly earnings. There were some good parts, some bad parts and some ugly parts. As a result of the earnings report, the stock price was up by nearly 10% in the after-hours. Let’s review the good, the bad and the ugly from Pandora’s quarter.
Total mobile revenue was up 97% year-over-year to $83.9 million even though mobile listener hours grew by only 47% during the same period. This shows me that Pandora is getting better at monetizing content.
Pandora Media Inc (NYSE:P) One, the ad-free version of Pandora which requires a paid subscription, passed 2.5 million members after 700,000 new members joined in the last quarter. The rate at which new members join Pandora One showed a 114% growth since the same quarter last year. Last February, Pandora Media Inc (NYSE:P) put a 40-hour limit per month on the amount of music that can be listened from a mobile device without paying. Apparently, this move helped Pandora gain a lot of paid members.
Total revenues grew by 55% to reach 125.5 million while total listener hours climbed 35% to 4.18 billion. Pandora’s market share in the U.S. radio system increased from 5.86% to 7.33% while the active users passed 70 million for the first time after growing by 35%. All these metrics are very impressive and they all show that the company continues to grow at a rapid rate.
For every 1,000 hours of listened content, Pandora Media Inc (NYSE:P) generated $30.01 in revenues, which is an improvement over $26.09 it generated last year. At the moment, Pandora pays about $20 for every 1,000 hours of content in shape of royalty payments and this is the largest cost for the company.
No profit yet
The company is still not profitable despite all the growth in revenues. In the last quarter, Pandora reported a loss of 16 cents per share whereas the company’s cash reserves shrank from $89 million to $75 million. Last year in the same quarter, the company’s loss was 12 cents which means Pandora Media Inc (NYSE:P)’s loss widened by 30% since last year. Operating expenses grew by 19% from $10.6 million to $12.6 million.
For the full year, Pandora expects to generate between $615 and $635 million in revenues and post EPS between -2 cents and +8 cents. This figure excludes stock-based compensation and assumes no to minimal tax.
Year to date, Pandora’s share price has been up by 103% and the company’s valuation looks too high even with the high growth rate. In the after-hours, Pandora’s market value passed $3.20 billion. Even if Pandora Media Inc (NYSE:P) reaches the high end of its guidance for the full year, we will still look at a company that trades for a P/E ratio of 232.
Here come the big guys
Until now, Pandora didn’t have a serious competition, but Google Inc (NASDAQ:GOOG) and Apple Inc. (NASDAQ:AAPL) are expected to become direct competitors with Pandora in the near future. Google Inc (NASDAQ:GOOG) recently started All Access, a paid-subscription model similar to Pandora, and Apple Inc. (NASDAQ:AAPL) is starting its own free online radio towards the end of the year. Both of these companies are big and popular enough to eat Pandora’s lunch. Apple Inc. (NASDAQ:AAPL) is particularly good at monetizing content and capturing attention of audiences. Considering that most of Pandora’s revenues come from mobile devices, the company should pay big attention to what Apple and Google Inc (NASDAQ:GOOG) are doing. Currently, Apple and Google’s ecosystems account for more than 80% of all smartphones being sold. There are also other competitors that are joining the market. For example, Nokia Corporation (ADR) (NYSE:NOK) offers its own music application, Nokia Music, which comes with every Windows Phone that’s being sold. At the moment, Nokia Corporation (ADR) (NYSE:NOK) Music is a free service and it is gaining popularity rapidly. It’s difficult to tell how Nokia Corporation (ADR) (NYSE:NOK) plans to make money on its application though.
Pandora Media Inc (NYSE:P)’s advertisement revenues barely keep up with content costs. In the last quarter, the company’s advertisement revenues grew by 49%, whereas its content costs grew by 48%. Overall, the company’s revenues grew at 55% whereas its costs grew at 53%, which shows that Pandora is having trouble with keeping its costs low while increasing its revenues. The company’s costs seem to grow as fast as its revenues do, which is not helpful for Pandora.
Overall, Pandora is a speculative play and investors should be cautious with it. If I owned shares of Pandora, I’d be selling covered calls to reduce my risk. Currently, the company’s value is not justified by its fundamentals.
The article Pandora Earnings: The Good, The Bad and The Ugly originally appeared on Fool.com and is written by Jacob Steinberg.
Jacob Steinberg owns shares of Apple, Nokia, and Google. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Jacob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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