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Why Investors Should Avoid Pandora for Now

June 20, 2014 | About:
kcpl

kcpl

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Pandora (P) has performed quite well this year in spite of all the disappointing rumors that are surrounding the company. According to consensus opinion, Pandora’s business was under a big threat due to high competition from Apple. But, the company has proved it all wrong and its recent results reflect the same and so does its share price.

Currently, the stock is trading near its 52-week high after it gained more than 200% in the past year. But, there are various concerns that surround the company due to which the investors are perplexed regarding Pandora. Let us have a closer look at the company.

Good moves

Pandora made significant progress in its product innovation. The company started the year with its Pandora Everywhere strategy, which helped it gain strong momentum and enjoy first-mover advantage. Also, keeping in mind that Pandora’s majority listening hours occur on mobile it has been focusing on mobile monetization.

Talking about numbers, its listener hours grew 16% to 4.54 billion in the fourth quarter from a year ago period of 3.91 billion. It saw an increase of 13% in its active users to more than 76 million as compared to last year’s 67.1 million. Also, its share of total U.S. radio listening increased to 8.6% from 7.6% last year. Moreover, Pandora’s market share increased from 7.7% last year to 8.57% in January this year.

This growth was mainly on account of the strength of its products. Thus, as we have already mentioned about the progress it has made in product innovation; Pandora continues to invest in this direction. It is also focusing on improving its services for its users and make Pandora available everywhere, which was its foremost strategy from the beginning of the year.

Smart strategies

As a part of its product innovation strategy, the company has invested in playlist technology by analyzing metadata and user interaction. This technology will help Pandora to decide which songs to play and when. It will also enable it to gauge other factors such as repetitiveness, song duration, and new music discovery. This will ultimately deliver an enhanced experience to listeners.

It made significant progress in its Pandora Everywhere strategy by making its product personalized according to customers’ needs at home, office, car, or on any other connected device. Consequently, Pandora has partnered with nine of the 10 best-selling passenger vehicles to make its songs available to its listeners. Some of the automobile companies include GM, Chrysler, Mazda, Hyundai, Toyota, Nissan, and Honda. Also, statistics have shown that more than 4 million unique users have activated Pandora through native integration across 25 major automotive brands. Some

Competition

However, Pandora had to struggle a lot when Apple launched iTunes Radio. Although the company is recovering from that loss, there are other big players in the industry as well, which can be a matter of serious concern for Pandora. According to reports Spotify, which is one of the biggest rival of Pandora is gearing up to launch an IPO. Although this is still a speculation but if it is true it is a big threat to Pandora as Spotify could use this cash to gain market share from Pandora.

Last year Spotify raised around $250 million at a valuation of over $4 billion. According to Reuters Spotify could be worth over $8 billion and the IPO looks likely as the company will need financial backing to fight off increasing competition.

Conclusion

The company has already started to see a decline in its active user base. In January, its active users fell to 73.4 million from 76.2 million in December. In addition, if Spotify launches an IPO, it will have enough cash resources to improve its services and eat into Pandora’s share. Moreover, Pandora has a forward P/E of 81, which is very expensive. However, if Pandora is able to sustain its active user base for a few quarters and turns profitable, then it might be able to attract some investors. But as of now, it would be prudent for investors to avoid this stock.


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