Why Pandora Lost 35% Of Its Value Over The Past Month?

The year 2015 was an eventful one for Internet radio company Pandora Media (NYSE:P), as it battled against the odds to ensure its survival in the music streaming industry. The company made a couple of meaningful acquisitions to bolster its topline and struck direct licensing deals so as to increase royalty rate certainty.  It also managed to bend the government’s royalty rate setting proceedings its way, keeping the rate increase limited to just 15%. Surprisingly, however, several analysts lowered their ratings and investors started losing confidence in the company after these positive news items surfaced. And, as a result, Pandora’s stock has been down 35% since mid-December. Investors are basing their concern on the fact that despite the positive developments, the company is still far from generating profits.

Our current price estimate for Pandora stands at $19, implying a significant premium to the current market price.

See our complete analysis for Pandora Media

Although Pandora has generated significant and growing  revenue over the years, an even faster increase in expenses has kept it unprofitable. Even during the third quarter of 2015, the company’s content acquisition costs increased a staggering 90% year over year, which trumped the 30% rise in revenues. Since Pandora’s active listener base has somewhat peaked at 80 million, investors are wondering how the company could increase its advertisement revenues substantially without a meaningful expansion in the service’s reach.

Pandora is trying to address this issue by adding a new concept to its business model with Ticketfly acquisition. However, it remains to be seen how much this side of the business can contribute to the company’s topline. Pandora is also improving the features on its listening platform, so as to provide free users an incentive to subscribe to its services and also garner additional advertiser attention. The company recently acquired Rdio to add new features to its platform, since similar features have worked very well for Spotify. However, investors seem to believe that just enhancing the platform would not draw much attention because Pandora’s music library is relatively weak.

To strengthen its music portfolio, Pandora has struck direct deals with music publisher Sony/ATV and performance rights organizations ASCAP and BMI. The Internet radio company is reportedly approaching other music houses with similar proposals as well, which makes it apparent that apart from getting better rates via direct deals, Pandora is also looking to diversify its music library. While this strategy makes a lot of sense, it seems that investors are more worried about Pandora’s ability to pay royalties for additional songs. By bolstering its music library and drawing incremental user attention, listener hours for the company will likely go up, which will lead to an increase in content costs.

Owing to the aforementioned concerns and a lackluster Q4 guidance, Pandora’s investors have been on a selling spree over the past month. However, we believe that this is an overreaction and there is much value to be unlocked in the company. Initiatives undertaken by the company over the past couple of months hold a lot of promise from a long-term perspective. We believe that in addition to pushing for higher advertisement revenues, Pandora must strive to make its business more reliant on subscriptions and constantly scout for alternate lucrative revenue streams such as Ticketfly.

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