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Pandora Media Inc (P): This Household Name Has Not Yet Proven Itself

Last week, Pandora Media Inc (NYSE:P) reported first quarter earnings that pleased Wall Street and sent the stock soaring even closer to its all-time high reached in early 2011. The time since Pandora Media Inc (NYSE:P)’s IPO, however, has not been what many investors had hoped, in large part because of the cost associated with licensing content. This past quarter proved successful from a revenue growth perspective, but there are several facts of Pandora Media Inc (NYSE:P)’s business model and operating structure that call into question the scale the company will need to achieve in order to produce substantive profits into the future. The company’s first quarter results are as follows:

Pandora Media Inc (NYSE:P)

Total mobile revenue of $83.9 million, growing 97% year‐over‐year

Pandora One subscribers surpassed 2.5 million, adding over 700 thousand net new subscribers in the first quarter and growing 114% year‐over‐year

First-quarter GAAP total revenue of $125.5 million, growing 55% year‐over‐year.

First-quarter total listener hours of 4.18 billion, growing 35% year‐over‐year

Share of total U.S. radio listening for Pandora Media Inc (NYSE:P) in April 2013 was 7.33%, an increase from 5.86% at the same time last year.

These results illustrate Pandora’s exceptional ability to grow customer count and transition to a mobile platform, but the transition to a mobile platform has only proven truly successful from a customer perspective, but not fully from a profitability perspective. The company lost $0.16 per share on GAAP basis during the first quarter of FY14, which is an increase in the company’s net loss from a year prior: ($20.23 million) versus ($28.57 million). Although much of this cost is associated with Pandora increasing its cost structure further through the addition of workers and investments in infrastructure, these losses point to Pandora failing to grow revenue at a rate that outpaces expense by a favorable ratio.

The transition from desktop to mobile may seem upon first glance like an extremely well executed transition, but the lack of profitability is frightening and ultimately makes Pandora Media Inc (NYSE:P) a “trade” rather than an “investment” in its current operating position.

Uncertain valuation

The main reason Pandora is a trade for investors and not a long-term investment is because of the uncertainty surrounding the company’s valuation due to its lack of profitability. In 2014, the company projects that it will report EPS between ($.02) and $0.01. Although EPS of $0.01 would indicate a fiscal year of profitability, this does not yet show the company’s ability to grow revenue in a way that is cost effective and profitable. Since 2012, Pandora has projected that 2014 will be its first year of profitability. If the company is unable to do so, investors may quickly loose confidence in the firm and the stock price will decline significantly. This is a common fear for many start-up companies, but Pandora is beginning to take hold as a mature business from a customer perspective, just not yet from an investors perceptive.

Revenue and cost per 1000 listener hours

A metric that Pandora Media Inc (NYSE:P) uses to analyze its operating structure is that of revenue and cost per 1000 listener hours. In the first quarter, the company has a large increase in mobile revenue per 1000 listener hours ($25.31 versus $18.86 last year), but the underlying detail is that the company’s overall revenue per 1000 listener hours is $30.01. This is because on a desktop basis, the company is earning nearly $49 per 1000 listener hours.

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