Pandora's path to profits unclear

The stock has tumbled since the company's IPO, and some analysts would like to see profits. The company's chief says there's no timetable for that.

By MSN Money Partner Apr 6, 2012 1:23PM

By Jon Friedman for MarketWatch.

 

Shreholders in Pandora Media (P) got an unwanted wake-up call on Thursday morning when Barclays announced that it had launched coverage of the personalized Internet rMarketWatchadio provider with an "underweight" rating on the stock.

 

"We would avoid (the) shares at the current time," Barclays analyst Anthony DiClemente wrote in an investment report. "We believe (the) valuation is stretched, as (Pandora) has negative earnings."

 

Pandora stock, already under pressure since the company’s initial public offering on June 15, promptly tumbled further. Scarcely 10 minutes into a new trading day on Wall Street, Pandora’s NYSE shares had dropped an additional 3.4%. Shares closed down 14 cents, or 1.4%, at $9.91.

 

Pandora is down 43% from its June 15 closing price of $17.42, the end of the first day of trading. The S&P 500 ($INX) is up 10% from the close of June 15.

 

The jolt in the wake of the Barclays note underscored Wall Street’s concerns about Pandora’s prospects. Investors fret over the deceleration of revenue per thousand listener hours on personal computers, the company’s lavish content costs (54% of revenue in fiscal year 2012) and, as DiClemente observed, that "the Street is already pricing in expectations for overly robust long-term listener and hours growth, which we believe may be more muted than expected."

 

The Barclays bulletin could be condensed to this question: When will this company finally make a buck?

 

No timetable

I put it to Joe Kennedy, the chief executive of Pandora Media, on Wednesday in New York. He said: "We don’t put a timetable on it. We haven’t given that guidance."

 

In the standard language of public filings, Pandora pointed out in its recent report to the Securities and Exchange Commission:

 

"We have not in the past generated, and may not in the future generate, sufficient revenue from the sale of advertising and subscriptions to offset such royalty expenses. As a result of these factors, we expect to continue to incur operating losses on an annual basis through at least fiscal 2013 (i.e. January 2013)."

 

But supporters of Pandora also point out that the company's total revenue for fiscal 2012 jumped 99% to $274 million. Meanwhile, market share of the Internet radio business rose to greater than 69% from 58% since Pandora's IPO. Pandora today owns about 5.8% of all radio listeners in the United States, up from 3% a year ago.

 

In addition, Pandora can boast more than 125 million registered users as of January, up from 82 million a year ago. And its active users -- people who actually use the service -- is up to 51 million active listeners from 32 million.

 

JP Morgan noted on Thursday that it continues "to view Pandora as a compelling way to play the mobile space."

 

The challenges

Still, one of Pandora's strategic challenges is that its users are increasingly adopting mobile devices, which are trickier to monetize on an advertising-centered basis. Of course, Pandora isn't alone in struggling with this issue -- look at Facebook. The cost of content is also among the concerns.

 

Separately, Pandora is dogged by suggestions that it faces a competitive threat posed by Spotify, which has gained a favorable buzz from users.

 

Kennedy shrugged: "Spotify is structured a lot like iTunes, only you lease the music rather than buy it. Your question is for Apple (AAPL)."

 

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