What Pandora's numbers tell investors
The average listener is spending more time with Pandora, and that bodes well for advertising-revenue growth.
Pandora Media's (P) stock price tumbled 25% last week when the company announced disappointing earnings and a less-than-rosy outlook.
But let's shift our focus away from the miss to the actual fundamentals driving the business. Revenue and subscriber growth have been stellar, but costs -- especially content costs -- are growing at a higher rate.
Below, we take a quick look at what the growth metrics tell us. Pandora competes with other radio players such as Clear Channel Radio, CBS (CBS) Radio, Sirius XM (SIRI) and Spotify, which has expanded via Facebook.
The above figures give us a few insights about Pandora's fiscal 2012 results.
1. Revenue growth was much higher than the growth in active listeners. The growth in advertising and overall revenue was almost same as that for listener hours. This implies that an average Pandora listener is spending more time listening to Pandora's songs, and that bodes well for advertising revenue growth. These figures further imply that Pandora has maintained ad monetization levels.
2. Subscription-revenue growth was slower than ad-revenue growth, implying that keeping the content free and selling ad slots remain the preferred choice for Pandora.
3. Total costs, especially content costs, grew at a higher rate compared to the revenue growth. This is the fundamental issue with Pandora's current business model.
The company will need to improve its ad-monetization or push-subscription services in order to stop these content costs (as a percentage of revenues) from rising. For fiscal 2012, these costs stood at around 54% of revenue. If Pandora is not able to get these costs down, there can be about 25% downside to our price estimate. You can gauge this by modifying the forecast above.
Overall while the growth looks good, content costs still remain a concern. We are in process of updating our pricing model in the light of recent earnings.
Our price estimate for Pandora stands at $9.48, implying a discount of about 20% to the market price.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The solid report comes a month after the retailer closed all of its Canadian operations.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.