Pandora Shares Slide On Q2 Results
Shares of Pandora (NYSE:P) are down by more than 12 percent today, following the company’s Aug. 22 second-quarter results. In early trading, shares were lower by $2.64 to $19.07 per share. The company generated strong growth amid rising competition; however, the street is left wondering when the company will reach strong profitability. Pandora had revenue of $157.4 million in the second quarter ending in June, up 55.4 percent from $89.4 million in the second quarter of last year. Mobile revenue grew 92 percent to $116 million and accounted for 73.7 percent of revenue, up from 59.7 percent a year earlier. In recent quarters the company has invested heavily in improving its user experience on mobile, and these expenditures are finally starting to bear some serious fruit. Mobile advertising RPM rose 52 percent on a year-over-year basis to $33.90.
Investments in Pandora’s platform, sales force and mobile application helped revenue growth, but unfortunately caused costs to rise. Net loss rose by 43.8 percent in the second quarter, from $5.3 million in the second quarter last year to $7.8 million. Loss from operations grew at roughly the same amount, 44.0 percent, from $5.4 million to $7.6 million. The additional expenses were not actually caused by increasing royalty costs. Royalty costs became less of a problem, as royalties dropped 12.9 percent to 52.0 percent of revenues. Cost controls including listening caps have helped the company avoid overpaying for its content.
The quarter was mixed, rising costs and increasing competition continue to weigh on the company’s results. Pandora’s competition may be the biggest headwind going forward, sinceseemingly every large technology company is looking for a piece of the Internet-radio game. Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Songza and Spotify have started stepping up their game. Amazon in particular has started to merge its MP3 offerings into the cloud. Using its application, customers can access Amazon’s music via its mobile device from anywhere they have access to the Internet. Moreover, Songza has started to change the way users think about Internet radio, a necessary step in the perfectly competitive market. Songza has a special feature called Concierge that matches specific, expertly-crafted playlists with activities it thinks you might be doing based on time, day and your preferences. If you’re going to the gym in the morning, for example, you can select a playlist already crafted for the early-morning workout.
Analysts were quick to downgrade Pandora’s stock following the report. One Stifel analyst in particular stated: “We have reduced our rating on Pandora from Buy to Hold. Three reasons: 1) The investment story for Pandora has shifted back from a focus on margins, including constraints on hours streamed, to a focus on market share at the expense of margins. 2) Upside in the July quarter came from sub revenues, not ad revenues, and this growth in subscriber revenues is likely to subside. 3) Shares were within 6% of our prior $23 target, not providing sufficient upside to ride through the volatility that comes with intensifying competition in the Internet radio market.” Clearly the analyst feels increasing competition will affect Pandora’s future growth potential.
Time will tell if the company can keep its costs down, while maintaining strong mobile growth. For the risk-oriented investor, Pandora offers exposure to the fast-paced mobile technology world. Shares are up more than 100 percent this year alone, a pullback may be an opportunity if you have been waiting to start a position in the company.
Disclosure: The author has no position in any of the companies mentioned, and does not intend to initiate a position in the next 72 hours.
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