Is Pandora Media's Stock a Buy Right Now?
Pandora Media's stock has lost about 50% since reaching its 52-week high on March 5. There are many reasons for the stock's poor performance. For one, the launch of Apple's competing iTunes Radio has most certainly been a concern for Pandora longs. However, after such steep losses, Pandora's stock might now be a good investment opportunity.
Expectations have been lowered
This has been the first year since Pandora's 2011 IPO that the company hasn't experienced gaudy year-over-year active listener growth. During its most recent quarter, Pandora's active listeners increased by just 7.5% year over year to 76.4 million. In the same quarter during 2013, active users increased more than 30%. Hence, the disconnect in user growth has played a large role in explaining the stock's recent selling pressure.
Two likely reasons for the sudden deceleration of active user growth is the rise of iTunes Radio and Spotify, the former launched last year. Already, iTunes Radio has more than 40 million users, which has undoubtedly slowed user growth for Pandora. Spotify has over 50 million total accounts and allows users to choose the song they want to hear rather than relying on Pandora's song-suggestion technology.
But although Pandora's active user growth is slowing, one area where it has thrived is in monetization. During the second quarter, Pandora's advertising revenue increased 39% year over year, accounting for over 80% of the company's $219 million in total quarterly revenue. Clearly, there is a large disconnect between Pandora's active listeners and its advertising revenue growth. The strong performance of the latter proves that Pandora's monetization tools are improving, and that it's squeezing out more dollars per user.
Furthermore, during Pandora's second quarter of 2013, its advertising revenue increased nearly 45%, which is fairly comparable to the same period in 2014. Hence, as revenue growth remains intact, it's rather hard to validate the stock's rather significant declines since March.
According to Pandora, its market share of total radio listening hours is just under 9%, which is pretty amazing since the majority of radio listening occurs in the car. As a result, Pandora has made an attempt to increase its market share of radio listening by getting inside vehicles. Already, Pandora's service is available in well over 100 models, including the 10 best-selling vehicles in the United States.
In retrospect, Pandora's strong revenue growth relative to active listener growth might very well be a result of its growing positioning in vehicles. Pandora creates the majority of its revenue with between-song ads. According to Statista, radio advertising in the U.S. is a $15.6 billion-per-year business, and a $35.2 billion business globally. This is a new market for Pandora to monetize, perhaps attracting new advertisers in the process.
A new monetization tool
As far as future monetization goes, one underlying strength of Pandora's business is data. Over the past few years, large corporations have shown an increased desire to spend money on acquiring data, especially marketing and advertising companies that use that data to target customers. According to Gartner, 20% of Global 1000 organizations will have established a strategic focus on information technology by 2015. Consulting firm A.T. Kearney estimates that global spending on Big Data hardware, software, and services will grow at a compound annual rate of 30% through 2018, at that point becoming a $114 billion business.
So where does Pandora fit into this equation? The company has generated more than 40 billion forms of feedback via likes and dislikes on music since the launch of its Music Genome Project. The company has yet to monetize this information on a large scale, but with this data the company can determine likes and dislikes based on age and geography, and with Pandora profiles linked through Facebook, Pandora might be able to match its data with even more information about their users that could be useful to advertisers.
While Pandora's data is nowhere near as diversified as the likes of Facebook, considering it applies only to music preferences, music labels might find such data useful. Theoretically, a company such as Coca-Cola might find the data useful when choosing music for advertisements, determining which targeted demographic likes what.
Another way Pandora is using its large collection of data is with promoted stations. Pandora gives advertisers access to its data, such as what users like, and allows advertisers to custom create stations, including the advertisements that are shown. Pandora has already partnered with Skechers, Taco Bell, and Toyota, but studios and music labels might also use promoted stations to give up-and-coming artists exposure.
The bottom line is that Pandora's days of significant year-over-year user growth may be behind it. The streaming music space itself is maturing, and there is more competition than in years past. However, with new opportunities in vehicle use, combined with Pandora finding new revenue streams and taking advantage of its data resources, revenue growth remains solid in light of lowered expectations. In other words, given Pandora's large stock losses, it might just present a good investment opportunity looking ahead.
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The article Is Pandora Media's Stock a Buy Right Now? originally appeared on Fool.com.Brian Nichols owns shares of Apple. The Motley Fool recommends Apple, Coca-Cola, Facebook, and Pandora Media; owns shares of Apple, Facebook, and Pandora Media; and has options on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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