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What are the prospects for streaming audio stocks?

By Chris Lau for Kapitall.

There is a report that Google ( GOOGL) might be interested in buying Songza, which looks like a move to counter Apple’s ( AAPL) acquisition of Beats Audio. Should these deals make investors bullish on the streaming audio industry? If valuations go up for stocks in this sector, what companies should investors focus on?

Songza valuation

Google could pay just $15 million for Songza, which would be a steal for a company that has 5.5 million active users. By comparison, Pandora ( P) has 77 million users and a market capitalization of $5.3 billion (based on a June 6, 2014 closing price of $25.58). Google’s possible move either implies Pandora is not worth $5 billion, or that Songza is not in a competitively strong position in the market.

Compared to online giant Netflix ( NFLX), Pandora is down in the last six months.

Netflix is a good company to compare to Pandora, because its price / sales is lofty at 5.6, but still lower than that of Pandora (which is at 7.9).

Pandora has high valuation

Even though Pandora is well off its $40 high, the company does not have a moat or exclusive content. Without any differentiation, investors are holding a risky prospect with shares of Pandora. Still, Google might decide it is worth buying out Pandora to secure an even larger user base. Google is expanding its music service, and both Pandora and Songza would add to the offering for its user base. Google might even want to buy Soundcloud. Twitter ( TWTR) is mulling buying Soundcloud, whose valuation is around $700 million.

Bottom line

Pandora is getting a lift from related takeover talks, but could trade down again if those deals fall through. It would be better for investors to watch the major players on the sidelines for now.

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