Shares of Pandora Media, Inc. (P) started Friday trading up 14% following the company’s second quarter earnings release Thursday evening. Before this move higher, shares were down 22% year-to-date and off by more than 47% over the past 12 months. 
Pandora reported second-quarter revenue of $285.6 million, above the company’s own guidance, slightly higher than the $283.1 million analysts were expecting and 30% above what Pandora reported for the same quarter last year.
On the bottom line, the company reported adjusted net income of $11.6 million, or 5 cents per share of Pandora stock while analysts were looking for just 2 cents per share.
Other impressive figures: Pandora’s active listeners grew to 79.4 million for the quarter, up from 79.2 million the previous three months and an increase from the 76.4 million it reported for the same time frame last year. Additionally, listener hours rose by 5% during the quarter to 5.3 billion hours.
Moving forward, Pandora expects third-quarter revenue to be between $310 million and $315 million and EBITDA of somewhere within the $25 million to $30 million range. Wall Street had been expecting revenue of $309 million.
Despite some decent growth during the quarter and Pandora stock’s quick jump, after reading the complete release myself and listening to the conference call, I am still not a fan Pandora stock.
Pandora is Trailing Facebook
During the conference call, Pandora’s CEO Brain McAndrews compared Pandora with Facebook. Apparently Pandora is now the No. 2 mobile service in U.S. based on average minutes per user — the No. 1 being Facebook (FB).
While that’s certainly an impressive figure, does it really mean anything for Pandora? If a user is on Facebook for 30 minutes, that means they are scrolling through a feed, chatting with messenger, perhaps even clicking on ads.
Facebook is an active experience, Pandora is a passive one. Pandora has now taken the place of the radio — used while driving, working out, or performing any other task that requires only partial concentration. But I can get up and walk away from my Pandora while it is playing. Facebook, on the other hand, actually requires my presence and attention.
Why does Brain McAndrews even make the comparison? Yes it is an interesting stat, but it really doesn’t mean anything since the two types of experiences are an apples-to-oranges comparison. Personally, this stat makes me more excited about Facebook than it does Pandora.
Other Threats to Pandora Stock
More worrying than those comments is how McAndrews is treating Apple (AAPL) and its streaming music service. McAndrews stated during the call that the threat from Apple has been overblown and that Pandora has not yet seen any meaningful impact yet, adding that management is not expecting any long-term ill effects.
Let me remind everyone, Apple just launched the service less than a month ago. While some have said that Apple’s service is very confusing and frustrating, the service was just released and it was likely to have some glitches. But with Apple’s massive user base and extreme amount of knowledge pertaining to listeners preferences from iTunes, Apple music will certainly get better with time.
In six months or a year from now, if McAndrews is still saying Pandora is growing and that the company has yet to feel any pressure from Apple’s service, then I’ll believe Pandora is clear from the fire. But it’s still way too early to tell at the moment.
Lastly, my biggest concern with Pandora at today’s price is the valuation. After the 5 cent beat for the quarter and the stock pop, shares are trading at 40 times forward earnings. Pandora stock is not cheap today and it has some major risks associated with it, Apple clearly being the largest one, but also Spotify.
While I am not opposed to paying high prices for growth, the problem is I don’t think Pandora has much growth left. Management stated during the conference call that their long-term goal is to have 100 million listeners. Well, that’s only 20 million away. While that would be healthy growth, it doesn’t really justify paying 40 times future earnings.
Bottom Line for Pandora Stock
Pandora is a service I use every day — even while writing this article — but it’s not a stock I am willing to invest in. The story isn’t compelling enough. I would sell at these levels, especially after the post-earnings pop, and I wouldn’t jump back into the stock until we give Apple users a few quarters to fully digest the new streaming service.
As of this writing, Matt Thalman was long Facebook and Apple. Follow him on Twitter at @mthalman5513.
