Rumors about the plans to expand Itunes Radio to more English-speaking countries other than US by early 2014 led to a turbulent week for Pandora, the music streaming industry leader. With about 72 million active users, Pandora has been the first music streaming website to go public. This year Pandora has outperformed the market, with an outstanding 159,95% year return, that comes with a 4,39bn capitalization, or 66 dollars per user.

Today, things are getting harder for Pandora: after 8 years in business Pandora is not profitable yet, the number of active listeners is growing very slowly (less than 1% per quarter) and the average hours per listener are decreasing. Plus, Pandora is still available only in US, Australia and New Zealand.

A world is moving around Pandora:

1. Great corporations are entering the market: Apple with Itunes Radio, Google with Google Play Music, Twitter as Twitter Music and Microsoft with Xbox Music. For now, they are not having a disruptive impact on the business, but these companies can reach faster agreements with major labels, fundamental feature of the business (and that’s why Itunes Radio is moving faster than Pandora).

2. Spotify, the most dangerous competitor, has been heavily funded (the latest valuation is around 5bn), marketed and already has a wider coverage.

3. There are plenty of fast-growing competitors such as Slacker, Songza, Rdio and Deezer (that raised 17M to enter the US market).

4. 50% of Pandora listeners are Mac users, probably more prone to switching to Itunes Radio in the coming months.

5. Itunes Radio has more content and it is cheaper for the paid version.

 

Last but not least, we still don’t know if the whole business model wrt advertising and subscriptions is sustainable (Pandora is not profitable yet).

Next earnings release is set for 4th December, the date is crucial to understand the impact of Itunes Radio on Pandora.
Waiting for the next earnings release we suggest to build a short position when the stock rallies, given Pandora’s high volatility buying puts could come quite expensive and shorting calls quite too risky.

Apple could have just only opened Pandora’s box, the worst is yet to come!


2 Comments

Pandora, quo usque tandem? : BSIC | Bocconi Students Investment Club · 22 February 2014 at 12:41

[…] our first report  the stock is up 50,6% and 218.88% YoY: investors feel confident about Pandora’s business. […]

What is happening to Pandora - and why it is not enough : BSIC | Bocconi Students Investment Club · 10 May 2014 at 12:22

[…] with tech stocks dropping and in particular for Pandora Media (P:US). For the first time since our first article, when we suggested to short sell the stock, our position is now profitable (+9,52%). The downturn […]

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