Pandora hammered after massive loss
The music service is losing money, but it could be reaping the benefits of the growth of mobile.
The stock was down 24% in the late afternoon to $10.85 -- well below the $16 price from its June initial public offering.
Pandora was one of the highest-profile tech IPOs of 2011 but one of the hardest to call. It uses algorithms to custom-pick songs and artists for users. Its service is free with advertisements or $36 per year on a premium basis.
Pandora's business model forces it to play by broadcasters' rules, and that's one reason it suffered an $8.17 million loss last quarter. Pandora has to pay artists (and record companies, of course) full royalties every time a song is played. This applies even if the user skips the song after one second. So even though revenue is growing fast, content-acquisition costs more than doubled from the fourth quarter of 2010 to $48.2 million.
There are some upsides to Pandora that should at least give one pause before pressing the sell button. Analyst opinion on the stock is mostly positive. Just Wednesday, Stifel Nicolaus analyst Jordan Rohan upgraded Pandora to a "buy" with an $18 price target. One of Pandora's greatest strengths, Rohan says, is its status as a staple app in mobile devices. Rohan sees Pandora leveraging its status as a "must-have tablet and connected-device application" with more ears than any traditional broadcaster into an extremely profitable mobile ad platform.
CEO Joe Kennedy told CNBC that Pandora's mobile-advertising haul quadrupled to $100 million in one year, making it second only to Google (GOOG) in the growing market. Mobile ad revenue per listener hour is up to $20 per 1,000 hours from $13 last year.
JPMorgan analyst Doug Anmuth also upgraded Pandora, with a $22 price target.
Ford (F), General Motors (GM), and other automakers now give drivers the opportunity to tune in to Pandora while on the road, helping Pandora steal listeners from traditional radio competitors -- and, in some cases, from Sirius XM (SIRI).
The company is projecting a loss for this quarter as well as the full year as it invests more in technology, expanding its already-dominant market share and growing its ad sales team.
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John Stumpf acknowledges that growth has been slow, but he says he's still optimistic.
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