The Amazon Way at Pandora

NEW YORK (TheStreet) -- Earlier this week on TheStreet in Twitter's Beating Pandora At What Should Be Its Own Game and Wall Must Demand Answers From Pandora ... Now, I discussed the Pandora (P) issue everybody should be, but nobody is talking about -- data.

But that's OK.

When I was busy writing about the stellar advertising business Pandora was building (and continues to build), there was scant discussion of it from others. Or it was doubted and downplayed. Now, that ad business has a real chance at driving $1 billion in sales, or close to it, for Pandora in 2014 (I don't care about the guidance Pandora gave).

This company is on fire and nothing other than itself can stop it.

The word "data" only came up, in some form, seven times during Pandora's earnings conference call. Unfortunately, none of the mentions dealt with what I discuss in the two above-linked articles.

The only reference to "data" worth texting home about dropped in this exchange between an analyst and Pandora CEO Brian McAndrews:

Heath Terry, Goldman Sachs: Brian, can you give us a sense, when you look at the opportunity at Pandora and particularly when you were coming on ... how did you think about where Pandora's advertising technology sat, how much of an opportunity that represented, and what your initial priorities were in terms of leveraging the data there?
McAndrews: ... And I think leveraging data, we're beginning to do that already. We target in over 100 different ways, different combinations of variables that we have ...
Right now, with zipcode, we have great location data, but over time, companies will look more at geolocation, and thats an area we can look at over time ...
So I think there's a lot of headroom there. These things take a while, but again, weve been making investments and continue to make investments to take advantage of those kinds of things.

If you've been reading me the last few years, you realize this is 2012, 2013 stuff. We already know all of this.

So, again, a Wall Street analyst asks a worthless question. What else is new?

What analysts should be asking is when will we see Pandora use its data in a meaningful way to do things other than targeted advertising. Of course, that business will continue grow and evolve into something more precise and sophisticated. That's exciting, however it's still Pandora 101.

What the company needs to do is turn big data into a revenue line separate from subscriptions and advertising. Everybody from bands to brands to record labels would pay handsomely for historical and real-time access to Pandora data.

I need to articulate, in practical terms, what this might look like as to illustrate the massiveness and urgency of the opportunity for Pandora. I'm on vacation next week so I'll be doing a lot of thinking about how I can best relay my thoughts and where Pandora might be headed with data (outside of targeted advertising).

With that in mind, we look elsewhere. For now. Specifically at the inspiration for the headline of this article. Nothing I have heard on an earnings call has ever excited me as much as this did ... 

The Amazon Way At Pandora

On Wednesday, Pandora CFO Mike Herring said this to Reuters:

It's not a time to try and optimize profitability ... We think we have a huge market opportunity in front of us.

And from Pandora's earnings press release a more formal reiteration of Herring's sentiment:

... To fully capture the substantial market opportunity ahead of us, we will continue to aggressively invest in 2014 in sustained audience and engagement growth as well as activities that further accelerate monetization. As such, our bias will continue to be toward revenue growth and capturing additional market share.

That's right out of the Amazon.com (AMZN) playbook and I love it. Amazon has created an environment where it's OK to say things like that. And that's a good thing for companies such as Pandora.

Because Herring is correct. Setting aside my very appropriate obsession with data, Pandora absolutely still has enormous opportunity to seize in the advertising space, particularly mobile.

Next time I see Herring I will kiss him. It's about time somebody borrowed the pair Jeff Bezos walks around with and used them for some good in the broad tech space.

The fact that Herring was allowed to make that comment gives me great confidence that the entrepreneural culture remains intact at Pandora (which makes me think the company is probably on the same page with me on the data obsession !). Not that there was ever reason to doubt it.

Pandora Continues To Torch Broadcast Radio At Its Own Game

On the call, Herring and McAndrews referred to how Pandora will continue to expand its salesforce. You can't overstate how huge this is.

To understand what Pandora's focus is and, more importantly, how it differs from every other Internet radio pure player or dabbler, see Here's Why Pandora Keeps Crushing The Market.

But, in a peanut shell, it comes down to poaching local radio advertising dollars. The more feet Pandora has on the ground in local markets, the more of that money it can snake from local radio stations who cannot target and offer the prolific advertising packages that have become routine -- and keep getting better -- at Pandora.

Consider some numbers and color Herring provided on the call:

I would say that, some of our competitors have 1,300 sales people in 80 markets. I think we're likely to put a decent number of sales people, maybe double where we are today, across 40 to 50 markets, and cover the rest through inside sales and technological solutions.

This isn't about RPM and CPM and all the jargon analysts like to impress one another with. It's about Pandora providing the digital, mobile and creative capabilities on everything from traditional radio spots to video ads to sponsorship opportunities at personalized Pandora Presents concerts. Again, it's about feet on the ground, meeting demand and shifting ad spend from broadcast radio to Pandora.

Growth

It's important to look at what McAndrews said on the call and realize Pandora has acknowledged the reality of its growth curve for at least as long as I have been following this company:

You know, I would say on the January metrics, there's a law of large numbers at some point, and we are very large, and so we're going to obviously see some declines in growth. But on the other hand, we still feel very good about that growth and as I mentioned in my remarks, one of our key strategies is to make sure we're continuing to invest in that growth.

So the cats who like to chirp about slowing growth at Pandora as if it's some gotcha moment are, simply put, full of it. What they need to focus on is Pandora's scale, which allows it to sell advertising effectively. As it expands its sales infrastructure it can sell more advertising. And, now that it has proven to the world that it can be profitable, it can ramp up investments in the spirit of the Amazon approach.

The Stock

Of course the stock dropped in after hours trading. But it will bounce back because of everything I discuss in this article and more (e.g., I didn't even get into auto integration, consumer products placement, UI improvements, etc.).

You have to step back and place some perspective around the run Pandora's stock has had.

Have a look ...

P Chart
P data by YCharts

When you go on that type of run, there comes a point where the overused phrase priced to perfection actually comes into play. Nothing short of a blowout quarter and blowout guidance could make the stock move after 188% upside over the last year.

If you're smart, you took some cash off of the table ahead of the report. If you didn't, you're probably wise to have done so after the numbers came out. There's never anything wrong with taking profits.

This is not a short-term trade (unless you want to get short). It's a long-term stock that you hold as a core position (hopefully having had banked profits along the way) and add in increments over time. Of course, this assumes you believe in Pandora's long-term story.

At this juncture, there's no reason not to. Even if you, like me, cast a critical eye on matters such as data.

--Written by Rocco Pendola in Santa Monica, Calif.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks. Rocco Pendola is a columnist for TheStreet. Whenever possible, Pendola uses hockey, Springsteen or Southern California references in his work. He lives in Santa Monica.

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