- Pandora,the streaming music service seen as dead money when Apple Music was announced, is doing better.
- A profit is expected this quarter, and royalty rates look to be manageable.
- Ticketfly is the secret sauce of profitability.
Pandora Media (NYSE:P) has certainly had an interesting quarter. Since last reporting earnings in July Pandora stock price has soared over 40%. Pandora Q3 2015 earnings are due to be reported on October 22, after market hours.
Contrary to expectations, the streaming music service did not die when Apple (NASDAQ:AAPL) Music launched and reached 6.5 million paying customers within a few months. Spotify, another rival, also claimed it had 20 million paid subscribers in June. Statista estimated Pandora’s paid subscriber count at 3.6 million at the end of 2014, but it is still believed to be the market leader, so it’s obviously growing fast.
All of which means that, while Pandora has not been a money maker before it may be about to become one. During the June quarter it cut its losses to $16.07 million, 8 cents per share, on revenue of $285 million. That top line was up 25% YoY, over the previous June quarter’s $219 million. The Q3 2015 analyst consensus earnings estimate is 9 cents, with a “whisper number” hoping for 11 cents, on revenue of $313 million.
Things are certainly looking up, although they have to look much better for Pandora to near its all-time high of $37, achieved in early 2014, and many of those who bought right after the 2011 IPO are still waiting on a meaningful profit. The stock had risen to over $20/share in the first week of trading, and on Tuesday, at noon, it was sitting near $19.50.
The biggest uncertainty has always been the royalties Pandora would eventually have to pay the artists on its service, and there is growing clarity on that. The U.S. Copyright Office seems to agree with Pandora’s view on music royalties, and it could cap royalties for all music published before 1972 at $90 million, a bargain. Pandora is partnering with the independent rights group Merlin to set other royalty rates.
The royalty news was so good that Pandora stock was halted, twice, on September 21, jumping higher each time. Royalties are Pandora’s biggest expense, and anything that sets a cap on those costs, or that gives an assurance of a future cap, is going to be seen as positive.
Even if the numbers for this quarter don’t look as good – the royalty benefits will kick in over time – Pandora made another move towards profitability this month by buying Ticketfly, an online ticketing provider, for $450 million. Pandora has also announced an iOS app that makes it compatible with Apple’s CarPlay service.
There is a lot of potential synergy in Ticketfly, as promotion and advertising on concerts is notoriously spotty – posters in the front window of bars and other shops are considered state of the art. Pandora can point fans of specific artists to Ticketfly, increasing sell-through and customer satisfaction with music. It is truly a win-win.
So what you’re looking at is a company that just needs to show a profit, and some revenue growth, in order to satisfy investors, whose average target price for this time next year is $23.38. Pandora Q3 2015 earnings are scheduled to be announced after market close on October 22.
So, buy or sell? I’m not a buyer here, but if I were sitting on some shares that are currently underwater I would certainly be tempted to hang on.