Pandora (P) is yet another example of a company whose product I use constantly, but whose stock I have avoided.
I discovered Pandora while rebuilding our New Jersey Shore cottage, which was ravaged by Hurricane Sandy. Pandora was a constant companion as I spent countless, frustrating hours learning new carpentry skills on the job. Now, not many days go by without one of my favorite Pandora stations blaring out of one device or another (it's on my laptop as I write this).
The issue I've always had with Pandora from an investment perspective, though, is trying to figure out how the company would ever generate a positive bottom line. I've avoided "upgrading" to commercial-free Pandora One ($4.99/month or $54.89/year), simply because there are not that many ads on the free version, and they really are not that annoying. I suspect that's true for a lot of users. In 2015, subscription revenue was 19% of total revenue, while advertising accounted for 80%.
Last year total revenue increased more than 26%, to $1.16 billion. But this is not a cheap business to run. Content acquisition costs alone were more than 52% of revenue in 2015, and the company lost $170 million.
Pandora did manage to beat first-quarter consensus estimates on both revenue ($297.3 million vs. $286.5 consensus) and the bottom line ($0.20 loss per share vs. $0.32 loss consensus), and revenue guidance for 2016 was raised to the $1.41 billion-$1.43 billion range. However, profitability still seems way off in the distance, if the company can ever get there.
The stock has languished, falling from $37 in early 2014 to about $8 in early April, as investors realized that a great and useful service does not necessarily translate into a great stock. The 33% resurgence since April is due to some activist-investor activity, which is what is making this story somewhat interesting.
Last week, Corvex Management disclosed a 9.9% "active" position in Pandora, and urged the company to put itself up for sale in order to maximize shareholder value. Corvex lamented Pandora's inability to "translate its great product into a great business with an attractive public market valuation." Corvex believes Pandora would be better off as part of a larger company with deeper pockets, than as a standalone, publicly traded company.
Pandora's balance sheet is in surprisingly good shape, with $349 million in cash and short-term investments, $33 million in long-term investments, and just $239 million in debt at the end of the first quarter. Its current enterprise value is just $2.37 billion, which, when adding an appropriate premium to the current stock price, could represent a rather small acquisition to the right buyer, if there are indeed any takers.
There's no doubt this is a very competitive space with the likes of Apple (AAPL) and Spotify. Given that fact, in conjunction with Pandora's operating history, a potential sale could make a great deal of sense. How about to Amazon (AMZN)? That may sound crazy, but Amazon seems to be getting into everything else (such as Prime Video), and certainly has the cash.
All this may be putting the cart way before the horse, but I expect that Corvex will continue to put pressure on management -- and that will be interesting to watch.