Shares of online music service Pandora (P) shot up by more than 16% on Friday as rumors spread that the company would be open to a buyout deal after all.
But investors should be wary of the stock. The company operates in an industry that favors much larger competitors.
In July, Greg Maffei, the CEO of Liberty Media, the majority owner of satellite radio company Sirius XM Holdings, made an offer for Pandora, which was refused. The offer valued Pandora at $3.4 billion, or $15 per share, but Pandora's board believed it could get more money elsewhere.
Reportedly, Pandora now realizes that that $15-per-share deal was good after all, because this week, people familiar with the deal have said that the company is open to another offer that would link it with Sirius XM.
At least, that's according to CNBC. On Friday, Reuters reported that Pandora has no wishes to sell, let alone to Sirius XM, and is instead focusing on improving its operations model and business strategy.
Pandora has been under much pressure to sell lately. The company has become the target of activist investor Corvex Management, a hedge fund run by Keith Meister. According to a letter from earlier this year, Corvex is pushing for a sale. "Despite its many strengths, the company has been unable to date to translate its great product into a great business with an attractive public market valuation," analysts for Corvex wrote.
Pandora was one of the pioneers of the music streaming sector, which now includes efforts from the likes of Alphabet, Apple and Amazon. And it currently boasts around 78 million listeners.
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However, Pandora's business model relies upon advertising -- rather than subscriptions -- for revenue. That revenue is starting to decline.
For the most recent quarter, the company reported that revenue rose by nearly 20%, but that fell short of Wall Street's forecasts. And the number of active monthly listeners is falling, taking a 1.6% hit in the quarter. Meanwhile, services such as Spotify and Apple Music are steadily building their rosters of users.
The problem is that Pandora is not officially classed as a streaming service. It's considered by the government to be an online radio station, and therefore its prices are controlled. The company tried to rectify this situation by purchasing a bona-fide streaming service, Rdio, for $75 million last year. However, streaming services have their own thorns -- namely, licensing charges.
For the full year, Pandora expects to lose more than $200 million. Year to date, Pandora's shares are down by more than 4%.
Although investors are expressing enthusiasm for the stock and the possibility it could be bought out by Sirius or Liberty, it's still a risky bet.
It is hard for companies to make money with music online. Only the biggest companies, such as Alphabet, Apple, and Amazon with their seemingly bottomless coffers stand much of a chance in this space.
Savvy investors should continue to be wary of Pandora. But there's good reason. A blistering financial storm is about to hit our shores. When it hits, weak companies and their investors will be washed away. You need to put yourself on solid ground. And that doesn't just mean changing your investment allocations or loading up on cash. I'll show you how to protect yourself and prosper when you click here.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.