With aggressive promotions by Apple Inc. (AAPL) Music and ongoing pressure from Spotify and Amazon.com, Inc. (AMZN) Music, the odds were certainly stacked against Pandora Media Inc. (P) during its last quarter.
Even with P stock down 45% over the last year, it was still a risky buy given the fact that users and listener hours growth was getting harder to come by, and Pandora had yet to really maximize its new revenue streams.
Turns out, Pandora is further along that most thought, but does that mean P stock is now a good investment?
Pandora Defies the Odds
P stock jumped 10% in response to strong earnings that beat revenue expectations. Sure, it missed the EPS target, but with higher obligations to artists, new leadership and a new vision, higher costs are no big surprise.
What is surprising is Pandora’s near-29% revenue growth against listener hours growth of only 4%, and despite adding just 200,000 new active users, making 79.4 million total. Pandora’s growth was driven by strong performance from its new ticketing service and local ad growth. The former added $22.3 million in new revenue and the latter surged 42% year-over-year to $61.3 million, and helped drive overall ad growth to 23% and $220 million.
Not only does this show that Pandora is tapping new revenue streams, but it further suggests that Pandora can continue to grow despite the slowdown in active listener growth.
Investors must remember that Pandora is still rolling out new services for its Artist Marketing Platform (AMP), and monetizing the platform is still in its infancy. In many ways, Pandora is still in the testing phase, so patience is a must.
What Does This Mean for P Stock?
At the end of the day, Pandora showed progress. While its hiked full-year guidance is a big vote of confidence for shareholders, I still have a problem with the fact that no clear path to profitability exists.
Pandora’s EBITDA was negative $57.4 million, and while the company’s EBITDA is expected to be closer to breakeven for the following three quarters, Pandora is nowhere near achieving positive EPS. For me, that’s a problem for P stock.
For 2016, investors expect higher costs, and will accept an EPS loss of $0.47 for the full-year. However, I don’t see how Pandora can maintain overall revenue growth in the double digits while improving its EPS in 2017 to a loss of only $0.05. Ultimately, Pandora must cut costs to improve its bottom line, and in doing so it risks top-line growth.
As a result, investing in Pandora is still a big risk. Yes, the company moved in the right direction during Q1, and if it can sustain local ad growth for several quarters, then maybe it can also gain pricing power and improve margins.
However, it is still too early to tell, and for that reason, investors are likely best suited to sit on the sidelines.
As of this writing, Brian Nichols does not own any of the aforementioned stocks
