Pandora (NYSE:P) is reaching new highs. It has been impressive on the stock market in recent times, having gained more than 200% over the last year. There were certain questions regarding Pandora’s competitive edge as it was believed to face stiff competition from Apple (NASDAQ:AAPL) and Google. The recent results also signify its good performance. Despite this, there are certain weaknesses which don’t make Pandora a good investment. Let us have a look at both sides of the coin.
The Story So Far
Pandora entered 2014 on the front foot. It made significant investments in product innovation. The Pandora Everywhere strategy is doing well on many fronts. Being a music service provider, Pandora is focusing on mobile monetization as the majority of Pandora’s listening hours occurs on mobile.
Pandora’s strength can be evidenced from the strength of its products. It is seeing a continuous growth in the user base. Listener hours grew 16% to 4.54 billion in the holiday period, up from 3.91 billion in the year-ago period. This is a clear indication of the company's increasing popularity. In addition, the number of active user also increased by 13%.
- Warning! GuruFocus has detected 4 Warning Signs with P. Click here to check it out.
- P 15-Year Financial Data
- The intrinsic value of P
- Peter Lynch Chart of P
Pandora's unique playlist technology is proving to be primary growth driver for Pandora. To refine its playlist technology, it has made significant investments by analyzing metadata and user interaction. Besides the desired song feature, Pandora’s playlist technology also comes loaded with features such as repetitiveness, song duration, and new music discovery; delivering a terrific experience to listeners.
Pandora’s product innovation has led to its expansion. Pandora has also improved the listening experience it provides to users. Pandora has a long list of good customer wins. It has made its way into nine of the 10 best-selling passenger vehicles. Over 4 million unique users have activated Pandora by way of native integration across 25 major automotive brands such as GM, Chrysler, Mazda, Hyundai, Toyota, Nissan and Honda.
Apple stands as a strong competitor for Pandora. With the launch of iTunes Radio, Pandora is worried about its position as iTunes Radio is attracting many users. Spotify is also one of the biggest Pandora rivals. Reports claim that Spotify has hired a U.S. financial reporting expert, which is a sign that the company is gearing up for an IPO.
These facts can be a speculation also as Spotify has neither accepted nor denied the fact, but it is something that Pandora is worried about. Spotify has a strong background. Spotify might be worth over $8 billion. The IPO looks probable as the company will need financial backing to fight off increasing competition. This is a clear competitive indication for Pandora, and can lead it to losing it market share.
Another negative point for Pandora is its stagnant growth, as the company lowered its earnings guidance for the next quarter, which has disappointed the investors. Pandora forecasts a loss of $0.14 to $0.16 per share, missing analysts’ estimate of $0.12.
The CEO’s statement that the company is maturing and growth can decline can lead to decline in its share price in the future. Despite aggressive and profitable looking moves, Pandora can prove to be a bad investment in the long run.
Despite impressive moves, Pandora still appears unprofitable as its business nears maturity. The expected decline in the active user base and the growing clout of iTunes is a negative. Further, if Spotify files for an IPO, it would have access to enough resources that would help it improve its services and eat into Pandora’s share.
Also by looking at its ratios, with the forward P/E clocking 48, Pandora is expensive. However, Pandora can be a worthy investment in the future if it sustains its active user base. Till then, investors should remain cautious and stay away from Pandora for the time being.