Pandora’s key competitors are Spotify (Private) and Sirius XM Radio Inc (NASDAQ:SIRI). Though Pandora is the leader, with 8% of market share, its competitors are slowly eating into its market share. A few years back, Spotify was a small London music streamer, and today the company has over 20 million subscribers. Sirius has reported a 5 year average sales growth rate of 30% and has also doubled its EPS y-o-y and reported an EPS of $0.025 in the quarter ending December 2012. Sirius has a much more sustainable business, with operating margins of 13.9%.
Pandora’s weakness is inherent in its model. While the growth opportunities are huge, the probability of profitability is also uncertain. This is mainly due to the high content costs. Pandora’s per-track royalty rates have increased more than 25% over the last 3 years, including 9% in 2013 alone, and are set to increase an additional 16% over the next two years. A 54% increase in revenues would be a huge blow to Sirius, which has a much slower rate of growth–but Pandora has a lot to prove and has to improve its margins.
If an investor is interested in a steady and long term investment, Pandora Media Inc (NYSE:P) is not the stock for him. In my opinion, Pandora is purely for speculative trading.
The article Turn Down the Radio originally appeared on Fool.com and is written by Sujata Dutta.
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