Turn Down the Radio – Pandora Media Inc (P): Sirius XM Radio Inc (SIRI)

Competition

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%.

Conclusion

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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