When Pandora first came out, it was amazing. We all loved how it could intuitively understand our tastes in music. Pandora understood, somehow, the subtle differences within a genre simply by analyzing an artist you might pick. And it's free.
You can filter out all the music within a genre you don't care for, and focus on music you like. At the gym, sitting on your riding lawnmower, even riding in the car (if your reception is strong enough), you can rock your own personal station.
But in investing, a person needs to take out all emotion. We've heard that said a million times, but people continue to make the same mistake.
I like Pandora. But I no longer use it. Between Spotify, music I've purchased on Apple's (AAPL) iTunes and terrestrial radio, there's no need.
Competition and tastes would never allow Pandora to thrive financially. While Pandora traded down to the $8 range, it has traded all the way up to $37. The stock closed Thursday at $28.72.
Those stock fluctuations didn't change its business model. It's still outdated!
Pandora has never been and will never be a profitable business if it doesn't radically change its business model.
Spotify is currently its biggest competition. The huge attraction for Spotify is that one can actually chose a particular song. As with Pandora's pay service, there are no commercials. It is just as intuitive about selections and recommending songs. The difference is that Spotify doesn't offer a free service.
I'm not here to praise Spotify. I'm here to discuss how easy it is to steal market share from Pandora. Every company that wants to enter the space will have to negotiate with the music industry for the right to play music. As Pandora has continued to slow in growth, its costs keep rising.
With the vast majority of its users unwilling to pay, Pandora will never be able to keep up these fees. You now see iRadio from Apple, Google (GOOG) (GOOGL) Play from Google, and even Amazon (AMZN) trying to enter the space. Google made an attempt to buy Spotify, but were turned down at the bid price.
Technical traders have no reason to like Pandora either. If that isn't a head-and-shoulders chart forming, I don't know what is.
The only bright side to Pandora is its huge short interest. Any positive news could create a strong short squeeze.
Bottom line, I wouldn't touch this thing with a 10-foot pole. There are no long-term positives without a huge shake-up in the business model.
One day we'll talk about how cool Pandora was -- like people reminisce about 8-track tapes.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates PANDORA MEDIA INC as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:
"We rate PANDORA MEDIA INC (P) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. Among the areas we feel are negative, one of the most important has been generally deteriorating net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The company, on the basis of change in net income from the same quarter one year ago, has underperformed when compared to that of the S&P 500 and the Internet Software & Services industry average. The net income has decreased by 1.2% when compared to the same quarter one year ago, dropping from -$28.59 million to -$28.93 million.
- The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Internet Software & Services industry and the overall market, PANDORA MEDIA INC's return on equity significantly trails that of both the industry average and the S&P 500.
- PANDORA MEDIA INC has improved earnings per share by 12.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, PANDORA MEDIA INC reported poor results of -$0.30 versus -$0.19 in the prior year. This year, the market expects an improvement in earnings ($0.17 versus -$0.30).
- 38.29% is the gross profit margin for PANDORA MEDIA INC which we consider to be strong. It has increased significantly from the same period last year. Regardless of the strong results of the gross profit margin, the net profit margin of -14.88% is in-line with the industry average.
- Net operating cash flow has significantly increased by 82.27% to -$2.24 million when compared to the same quarter last year. In addition, PANDORA MEDIA INC has also vastly surpassed the industry average cash flow growth rate of 18.54%.
- You can view the full analysis from the report here: P Ratings Report