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Play of the week: Short Pandora (P)

October 17, 2011

It’s Monday morning, so it’s time for the stock of the week.

Get short Pandora (P). I like the Nov. 19th $12 puts at $.75 and $13 puts at $1.11. Looks like markets will open marginally higher today, so wait for these prices to go down a bit before buying.

Why?

Pandora’s market cap is $2.5 billion. Need I say more? I suppose I should, because idiots have still been buying this stock for past couple weeks. Spotify has recently launched in the US, and has been outpacing Pandora’s growth in the states. Pandora can’t keep licensing costs under control, and is not projected to be profitable until late 2013. This projection does not even account for the large influx of competition in the internet and mobile streaming radio sector: Grooveshark, Spotify, RDio, Slacker, Turntable.fm, etc all do a better job of allowing the listener to choose precise songs rather than only hearing every song by an artist except the one the listener wants to hear. In addition, these other services do not have annoying bumper audio ads that interrupt the listening experience. On top of all this, everyone’s favorite 800 pound, $43 billion in cash carrying gorilla is about to enter the streaming music fray — that’s right, Google is expected to launch a streaming radio service in the next couple weeks. And I imagine it will be much more user-friendly than Pandora, with 3-4x higher ad revenues per listener-hour (Google is the worlds top ad network), and greater user continuity across computers, smartphones, and iPads.

Why might Pandora fanboy analysts be right?

Pandora was the first major streaming radio provider, and they do possess a large market share (3% of US radio listening hours). They also have ~40 million monthly listeners, which is nothing to scoff at.

Why the fanboys are wrong:

Listening and subscription numbers can be touted to the moon and back, but it won’t make a difference in Pandora’s bottom line. What matters are costs and revenues. Right now, Pandora is paying through the nose for music licensing while having significant trouble luring advertisers. As mobile Pandora continues to grow, an optimistic revenue number would be $1 per thousand listener hours. I’ll explain:

Most mobile ads typically generate between $.50 and $1 CPMs (revenue per thousand ad impressions). Advertisers pay Pandora when the user clicks an ad, or signs up for the advertiser’s email list or whatever. Let’s say Pandora has 20 million mobile users, who each listen for an hour per day. That’s 600 million listener hours per month (20 million x 30 hours/month).

600 million listener hours/1000 impressions = $600,000 per month in ad revenue from mobile ads.

Pretty paltry considering Pandora’s market cap is $2.5 billion.

Mobile accounts for 70% of Pandora’s userbase, and is continuing to grow. However, monetizing on mobile is much more difficult and with lower payouts than other media.

Pandora is in trouble, seriously.

 

Sources:

http://techcrunch.com/2011/08/25/pandora-posts-record-revenue-of-67m-in-first-quarter-as-a-public-company/

http://wallstcheatsheet.com/trading/will-google-grab-this-web-music-leaders-market-share.html/

http://seekingalpha.com/article/274900-is-pandora-worth-2-billion

http://www.dailyherald.com/article/20111015/business/710159935/

http://seekingalpha.com/article/279335-why-pandora-may-not-be-profitable-until-2013

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