- Pandora has failed to increase its paid user numbers in comparison to peers Apple music and Spotify.
- The result has been a revenue mix heavily tilted towards ad revenues, making the overall revenue profile risky.
- Failure to reign in content acquisition costs and a precarious cash position makes Pandora stock a highly risky bet.
Pandora Media (NYSE:P) stock has been an absolute roller coaster ride leaving investors in pain rather than a feeling of joy. After closing the last trading session (Tuesday) under $8, Pandora stock is only a fraction of what it traded a couple of years ago when it hit a peak of close to $40 in March 2014.
So, What exactly has brought about this trouble for Pandora investors? Can the causes for this fall be corrected, leading to a turnaround in the fortunes of Pandora stock? A deeper look could help answer these questions.
Pandora User Growth Is Stagnating
Pandora today is facing questions regarding its ability to grow its user numbers. The problem is a two sided one for Pandora. Pandora reported a drop in its active listener numbers even as its competitors are actively growing their user numbers. Pandora closed Q4 2015 with 81.1 million active listeners, which was down from 81.5 million in the year-ago quarter.
Founded in 2000, the one-time leader in the online music streaming industry is today falling behind younger competitors Spotify and Apple Music in terms of paid subscribers. Spotify is hot on Pandora's tail, having reported 75M active subscribers last June and 20M paying subscribers. Going by the growth in paying subscribers, 8M new paying subscribers added by the end of 2015, Spotify should be closing in on Pandora's number of active listeners too. Pandora, with around 4.3 million paid subscribers also trails Apple music's 11 million paid subscribers.
The stagnating user growth is one of the prime reasons which has been a drag on Pandora stock price. For a stock like Pandora, priced for super growth, stagnating on user growth numbers is a big crime and the market hasn't let that go unnoticed.
Failure to grow subscriber numbers has led to another problem for Pandora. Pandora's revenue mix is today highly dependent on ad revenues, which contributed 80% of Pandora's FY 2015 revenues.
Ad revenues are more volatile compared to subscription revenue, and the fact that Pandora has 80% revenues contributed from the ad channel will not go down too well with investors.
Pandora Rising Content Acquisition Costs Are Worrisome
A closer look at Pandora's latest annual financials throws up another interesting fact. The content acquisition costs significantly outgrew the topline in 2015. While revenue growth for FY 2015 came in at 25.3% YoY, the content acquisition costs overshadowed this growth with a 35% YoY growth. If this trend persists, it will mean Pandora's already negative bottomline will fall further into the red.
Moving over to Pandora's cash position, the company registered a cash outflow of $71 million in Q4 2015 compared to a $25.1 million operating cash inflow in the year ago quarter. Moreover, the company closed the quarter with $416 million in cash, after accounting for proceeds of $293 million from convertible debt and capped call transactions. The biggest dent to Pandora's cash hoard came from the ticketfly and Rdio acquisitions, payments for which amounted to $246.5 million.
Taking into consideration the long-term debt worth $234.58 million, Pandora's net cash position at the end of Q4 2015 stood at $181.4 million, which was 2.6X the operating cash outflow in Q4 2015. The bottomline here is that the recent cash acquisitions could force Pandora to dip into the capital markets sooner rather than later.
Pandora stock, which was priced for extraordinary growth, has been hit hard by failure to grow its user numbers. With the stagnating user growth, rising competition, increasing content acquisition costs and a precarious cash position, a turnaround in Pandora stock price looks extremely unlikely at this point.