Pandora Media (NYSE:P) recently reported February 2014 metrics, and it appears that the service continues to gain popularity in the U.S. The number of listener hours, active listeners and market share saw an increase over the same period of last year. However, the magnitude of growth was slightly lower as compared to that observed in January 2014. Here we present a quick snapshot of Pandora’s growth in the first two months of 2014 in form of charts, and reiterate our view that it is profitability which should matter now, and not the user base growth.
Our current price estimate for Pandora stands at $24, implying a discount of about 30% to the market price.
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Growth Observed In The First Two Months Of 2014
The metrics suggest that Pandora continued its growth in the first two months of 2014. Even though there was an observed decline in the number of listener hours in February as compared to January, much of which can be attributed to seasonality. Internet radio market share is a seasonally adjusted figure and gives a truer picture. Pandora grew its share both year-over-year and sequentially, ending February with 8.91% market share. However, the year-over-year growth in the number of listener hours and the market share increase were slightly less in February as compared to January, which suggests that the year-over-year growth is coming down every month. This is in-line with the trend we have seen in recent quarters. The essence is that Pandora is still on the right track and attaining stable cash flows is a priority now rather than the growth in the number of active listeners.
Profitability Should Matter To Investors
For the stub period of November and December, Pandora’s overall RPM (revenue per 1,000 listener hours) stood at $44.71, which is an all-time high.  (A fiscal year-end change from January to December produced the stub.) The figure benefited from seasonal strength due to the exclusion of January results, when the ad spending tends to go down. Ad RPM and total RPM for mobile and other connected devices reached $36.38 and $40.14 respectively, again an all-time record. Given that Pandora pays royalty costs to record labels and artists based on the number of songs played and not the revenue earned, any improvement in monetization (revenue per song) is going to add to the margins. The company has been ramping up its sales force to sell more mobile ad inventory slots to advertisers who are directing some ad budget to Pandora because of its local appeal and targeting ability. The additional selling and marketing costs have offset the margin growth to some extent.
What’s worth considering is that Pandora seems to have addressed the biggest concern of investors — whether or not it can create a profitable business? And the business seems sustainable as the company expects to continue generating profits for the full-year 2014, despite expecting some loss in the first quarter. It is a pleasant development that Pandora has started generating profits, and could use its cash flows to fund overseas expansion in the longer run. That said, the market’s valuation may be inflated. The service is impressive and the business model has started to make sense, but that may not be enough to support the kind of valuation multiples that the stock is getting.Notes:
- Pandora Media’s SEC filings [↩]