- Pandora is unable to compete with Apple Music based on recent revenue releases.
- The management seems ineffective based on the unnecessary and expensive recent acquisitions.
- Pandora is unlikely to be an acquisition target for a large technology suitors.
Pandora Media (NYSE:P) shareholders have experienced a disappointing past two years. Pandora’s stock peaked at $38 in February 2014 and now trades at less than $10. Investors may be tempted to purchase the Pandora stock given the significant drop, but I think they shouldn't. Investors should stay away from Pandora as the company has a slim probability of future success.
Pandora Faces Competitive Pressures
Pandora’s primary business is streaming music; the company collects the majority of its revenue from advertisements and a lower amount from paid subscriptions. Both of these revenue sources are at risk.
Pandora was one of the first streaming music services to launch. It launched before Spotify, Apple and a host of smaller competitors. As of June 2015, Pandora had 4 million paid monthly paid subscribers compared to Spotify’s 20 million. Apple (NASDAQ:AAPL) is the newest entrance in streaming music and now has 10 million paid subscribers (Jan 2016).
Unlike magazine subscriptions, consumers are unlikely to pay for multiple streaming music services. All services offer similar programming. If Spotify and Apple Music continue to add paid accounts faster than Pandora, Pandora may have limited future growth. Future potential customers will already be paying for Spotify or Apple and will not pay for Pandora.
The second and larger segment of Pandora’s revenue mix is advertisements from free accounts. The strength of this business is driven primarily by listener hours. The more listeners Pandora has the more advertising revenue it will generate. Apple does not have a free option, outside the three-month trial, so it does not compete with Pandora directly for ads, but if it does snatch away listeners, the net impact would be the same. Spotify, a private company, is Pandora’s largest competitor and is growing extremely fast.
In Q1 2015, Spotify increased advertising revenue by 53% year over year compared to a 27% increase for Pandora. Spotify is a private company and does not disclose quarterly data. Over the past four quarters, Pandora has never managed to break the 40% year over year quarterly advertising revenue growth ceiling. Since ad revenue growth is driven by listener hours, investors should assume that Spotify is growing it's free usage faster than Pandora.
Similar to how consumers will not pay for multiple streaming services, consumers are also unlikely to use multiple free streaming services if the programming is the same. If Spotify continues to increase listener hours faster than Pandora, as shown by its advertising revenue, Spotify may get future customers locked up before Pandora.
Pandora is losing to its competitors in both paid subscriptions and advertising revenue from free usage.
For any company to survive in a competitive environment, like streaming music, it must have top notch management to set the company’s direction and execute against it. A simple method to measure management effectiveness is to examine M&A activity. All M&A activity is done at the sole discretion of company's management, so it's a good reflection of their effectiveness.
On October 7th, 2015, Pandora announced it would acquire ticketing startup TicketFly for $400 Million in cash and stock. At the time, Pandora's stock price was $22 per share and its market capitalization was around $4 billion. Pandora’s management said the acquisition would help its listeners find better live music events. Pandora spent 10% of company market capitalization for the acquisition.
It's unlikely that acquiring TicketFly will do anything to help Pandora’s core business of paid subscriptions and advertising revenue. Consumers are not likely to use Pandora instead of Spotify or Apple Music based on their ability to find live music events. On October 23rd, two weeks after the acquisition announcement, Pandora’s stock dropped 30% after a weak earnings announcement. Investors do not believe TicketFly will help fix what is wrong with Pandora’s business.
One month later, on November 13, Pandora announced it acquired assets from music streaming provider Rdio for $75 million in cash. At the time, Pandora had approximately $373 million in cash and short-term receivables. Pandora spent nearly 20% of it to acquire Rdio which recently filed for bankruptcy. Pandora’s management is trying to compete with Spotify and Apple Music by building on the remnants of a failed company. This does not seem like a winning strategy.
At the time of the Rdio acquisition, Pandora was trading at $13 per share. It has now dropped to less than $9/share. Investors do not believe these two acquisitions will be beneficial to Pandora. At least based on its M&A activity, Pandora’s management doesn't come across as very effective.
Pandora's Lack Of Suitors
Many struggling technology companies are often acquired by larger, stronger firms similar to how Verizon purchased AOL. Pandora is unlikely to find a rich suitor. Apple has already launched its own streaming music business after acquiring Beats Electronics. Neither Google, Facebook nor Amazon bid on the Rdio acquisition when Pandora did. Google (Google Play Music) and Amazon (Prime Music) both already have streaming services albeit ones that are very small. Though there is no public valuation for Spotify available, it would likely be a stronger acquisition target.
As mentioned above, Spotify has significantly more paid subscribers than Pandora and it is also growing advertising revenue faster. For Google, Amazon or Facebook to compete with Apple Music they would likely acquire a strong streaming service like Spotify versus Pandora.
While Pandora’s stock price has fallen significantly in the past four months, investors should still stay away. Pandora’s paid subscriber count is significantly lower than Apple Music's and Spotify's, even though both competing services were launched after Pandora's. Pandora’s management has made unwise acquisitions with the purchases of TicketFly which may not help its core business and Rdio; a bankrupt streaming music provider. Additionally Pandora is unlikely to find a suitor as Apple already has a formidable streaming service and Amazon, Facebook or Google would likely purchase the stronger Spotify instead.
The only possible salvation I see for Pandora would be an acquisition from Amazon, though as mentioned above, it is highly unlikely. Amazon could acquire Pandora to increase the attractiveness of its Prime service however that would be at a very high cost, and seems far fetched.