Pandora Media Inc (NYSE:P) stock was up as much as 7% in early trading Monday after reports surfaced that streaming music rival Spotify raised $400 million at a $8.4 billion valuation.
While the enthusiasm was quickly fading after the opening bell, the market appeared to be cheering Spotify’s new valuation, which clocked in above $5 billion in September.
In other words, over the last seven months, Spotify’s valuation has risen nearly 70%, or $3.4 billion. For reference, the market capitalization of P stock was just more than $3.5 billion before today’s move.
Pandora’s stock price could certainly use today’s rally. After nearing highs of $40 per share in early 2014, P stock has come back down to earth, with losses of roughly 50% since then.
However, is the surge in the P stock price today — a surge driven by its competitor’s wildly successful fundraising round — deserved?
Unfortunately, I think the answer to that question is a resounding “No.”
Pandora Has Problems Galore
I’ve written several times before about the woes facing P stock. One of its biggest problems is simply one of competition:
“Consider Apple Inc. (NASDAQ:AAPL), for instance, with its iTunes Radio and $3 billion acquisition of Beats. AAPL is aggressively muscling in and has a tidy sum of $178 billion to throw at its problems. Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) has Google Music, Microsoft Corporation (NASDAQ:MSFT) is running Xbox Music, and Amazon.com, Inc. (NASDAQ:AMZN) is no Silicon Valley bum, either.”
Pandora also has to worry about Spotify on top of those guys, and with Jay-Z shelling out $54 million last month to acquire Aspiro, a small-cap Swedish music-streaming company, even Hova is getting into the game.
But the larger issue still for P stock is the fact that the company is not yet profitable (on a generally accepted accounting principles, or GAAP, basis). Pandora has lost money in each of its last five fiscal years, with net losses exceeding $116 million over that period.
Spotify, for its part, isn’t a public company and doesn’t have to disclose its financials. But as of May 2014, Spotify had at least 10 million people paying the $9.99 monthly fee for its premium service, bringing annualized revenue to at least $1.2 billion. (That’s not even including the revenue Spotify earns from playing ads on its free service, which has a far larger user base.)
There’s no doubt Spotify has grown those numbers in the 11 months since those data were released. So, given the fact that Pandora hauled in just $920 million in revenue in 2014, Spotify’s revenues probably now exceed Pandora’s by a large margin.
Bottom Line
The stock market is giving Pandora undue credit for merely existing in the streaming music space at a time when its competitors are growing by leaps and bounds.
Of course, by no means does this make Pandora a winner, and given the fact that Spotify now has another $400 million to work with, I’d be selling out of P stock on this news rather than loading up on it.
As of this writing, John Divine owned shares of AAPL stock, GOOG stock and GOOGL stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
