Wall Street has grown much more optimistic about Internet company Pandora Media (NYSE:P) since the company showed that ad revenues really are growing faster than its costs. Shares are up about 90% since a November low, when its third quarter earnings were released, and the trend was reaffirmed last month. It’s apparently a happy enough development to cause investors to forget that behemoths Apple (AAPL) and Amazon.com (AMZN) might stomp out Pandora’s budding profitability any day now.
The bravado in that stock chart comes from relief that Pandora’s business model isn’t completely flawed. The company allows music listeners to create online, advertiser-supported “stations” that play their favorite artists like, oh say, ACDC, and others like them. In order to operate profitably, the company’s ad revenue has to outstrip the amount of royalties it pays each time a listener streams a song. While Pandora has been hugely popular – it quickly took 8% of the radio market – ad revenue grew more slowly. Expenses have outweighed revenues.
Last month’s earning report carried the particularly heartening news that total mobile ad revenues had grown 111% compared to listener hour growth of 70%. (The company’s mobile ad rates are about half of others, but both rates and actual ad numbers will grow much faster on phones and tablets than elsewhere.) The company didn’t promise profits for the current fiscal year, but it didn’t rule them out either. It has ramped up Pandora’s forward share price to sales valuation to about 5.5.
Meanwhile, Apple is reportedly working on its own Internet radio plan that would bypass those compulsory licensing fees that are so pesky for Pandora. Apple already has some 400 million iTunes accounts to tap for listeners. Amazon, too, is supposedly on the prowl for licensing deals that would allow it to build a streaming service. Pandora has a great head start, but Apple and Amazon certainly have a lot more money to throw toward building a radio venture. Spotify is a more immediately pesky competitor, with over 20 million active users already.
Pandora’s long-time chief executive has announced plans to leave the job as soon as a replacement is found, making way perhaps for someone with more background selling radio advertising. The company appears to be on the cusp of profitability, and that’s often a good time for investors to get interested in a growth company. Just don’t forget about the heavyweights on the sidelines that haven’t even begun to play.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at email@example.com.
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