Pandora Upgrade Can't Cover the Sour Notes

NEW YORK (TheStreet) -- Pandora's (P) stock moved strongly higher in trading Monday, partly on the boost provided by an upgrade from Wedbush. But the shares have given up those gains and are down more than 4% at $27.09 in recent trading.

What challenges the company had when the stock began its decline last month still remain, but the increased listener hours the company reported for March -- and is likely to report going forward -- together with a lower share price may be enough to renew some investor confidence. 

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"Our takeaway from the March metrics is that Pandora is well-positioned to meet or exceed our Q1:14 estimates," Wedbush said in Monday's report, raising the stock to "outperform" from "neutral." The firm is impressed by the company's 1.71 billion listening hours reported for March, up from 1.51 billion the previous month and above Wedbush's estimate of 1.66 billion hours. Those numbers were released ahead of the company's first-quarter earnings report, due April 24. But the report also noted several other positives, including that revenue per listener hour is expected to increase as the company's measurements are improved and advertisers are better able to target their efforts.

Wedbush said Pandora's decision not to release monthly listener metrics is a positive for investors, as it will reduce volatility in the stock price. Lastly, the analysts conclude that the Music Genome Project, the song profiling database behind the algorithms that serve Pandora's users, gives the company's listener experience a heightened degree of personalization, making it impervious to existing competition in the short term.

The last point is the most important. Personalization is all well and good, but personalization is not usefulness. As I have said before, music may be intensely personal but it is also intensely social and the social aspect, sharing music among friends, may well prove to be more important for a streaming service's growth.

Does Pandora's model do that more effectively than Beats or Spotify? I don't see it. I see them as equal. And if that is true it opens the door for another company, for whatever reason, to gain popularity with listeners, effectively nullifying the benefits of the heavy lifting done to create and maintain the Music Genome.

When I brought this up with Pandora's Chief Scientist Eric Bieschke in our interview at SXSW, he went to lengths to express confidence in the MGP and its significant contribution to the user experience and the company's bottom line. But he also made it clear that his focus was on the best user experience -- to that end, even the future of the MGP was negotiable.

But compromising the MGP seems unlikely. The company's brand depends too heavily on it, especially in the face of growing competition.

Pandora is more based on traditional radio, while most of the other services allow users to select tracks and playlists. But the similarities between Pandora and other services outweigh that difference. Users turn on a service expecting to be able to hear music at least related to a particular artist or sound and have that service make suggestions back to them for further listening. All of them do that reasonably well.

Beats Music, a smaller scale subscription-only service that builds on its Beats headphones brand visibility, entered the space in January. Spotify, the world's largest streaming service, is a strong second to Pandora in the U.S., but outstrips it internationally. Rumors are that Spotify could have an initial public offering this fall, making Pandora's job of selling its strategy to investors that much harder. Deezer is also an important player outside he U.S. and could eventually make inroads here. 

Apple (AAPL) has also entered the picture with its iTunes Radio. Other competitors, like Rdio, are smaller players but can't be counted out of the running.

While this competition has heated up in recent months, TheStreet's Rocco Pendola in recent articles has argued that Pandora is stuck in its thinking, particularly with regard to potential uses of its trove of user and song data. In Pendola's opinion, the company should have a major push to marry record labels and artists with potential audiences, facilitating tours and shows. He also noted that recent moves by management seem more intent on preserving rather than growing the company's mission. Those moves include hiring CEO Brian McAndrews.

As Pendola related, McAndrews was given a private office, counter to the company's longstanding "open-office" policy. The symbolism of the change, suddenly deciding that the CEO needs to be isolated from his staff, implies that his mission (the new mission of the company) and the mission of the rank-and-file (the old mission of the company) are not entirely in sync.

Still Wedbush makes a valid point: Based on available metrics and a projected net worth of the company, the stock price is undervalued. Significantly, despite all the positive numbers the report cites, Wedbush didn't raise its price target for the stock, but left it at $35. That makes Pandora good for a buy, certainly, but whether that's a long-term proposition is another story.

The company's current leadership situation is certainly confusing. Followers have the sense that McAndrews was brought in for a specific purpose, but that purpose is shrouded, a major unknown. 

-- Written by Carlton Wilkinson in New York 

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