Pandora (P): The future is bright here

By Timothy Lutts, Editor of Cabot Stock of the Month
From Cabot Wealth Advisory 7/29/13 Sign up for free Cabot Wealth Advisory

Pandora (P) was first recommended by Cabot Top Ten Trader on April 1 of this year, when it was trading at 14. Here’s what editor Mike Cintolo wrote.

“Pandora, making its debut in today’s Cabot Top Ten Trader, is an Internet radio service that lets listeners create up to 100 personalized stations on which they can listen to unlimited hours of free music and comedy. The company also runs Pandora One, a paid subscription service. The company’s Music Genome Project is an ambitious program to analyze and categorize all of pop music to allow users to find exactly the music they want. Pandora’s users listened to 2.7 million hours in Q4 2012, and are estimated to have listened to 4.0 million hours in Q1 2013, a 46% increase. Revenue comes primarily from advertising, with subscriptions and other sources making up the other 13%. Pandora is a major holdout from the domination of Apple’s iTunes as a music source, and some analysts speculate that an Apple deal with Spotify might take a bite out of Pandora’s market share. But with over 125 million registered users, Pandora is a successful business right now.”

Four weeks later, with the stock still trading at 14, Mike added, “Pandora’s listenership has been on the increase, with March’s figures reflecting a 40% jump in listener hours from year-ago levels. Active listeners numbered 69.5 million at the end of March, up 36%. Pandora’s earnings dipped to a four-cent loss per share in Q1, reflecting higher royalty costs for the music that it streams. Pandora’s advertising revenue hit $109 million, while subscription and other revenue came in just over $16 million. Revenue per thousand listener hours (RPM) increased by 22%.”

Since then, we’ve seen the second-quarter earnings report, which revealed revenues growing 55% from the year before, and the loss per share expanding to $0.12.
But two important metrics argue that the future is bright here!

First, the number of institutional investors holding the stock continues to grow; it’s now at the highest level since the company’s IPO in June of 2011. And second, the stock itself is advancing!

Soon after those April recommendations in Cabot Top Ten Trader, Pandora launched itself higher, topping 19 in May and 20 in early July. It’s currently on a reasonable correction, toying with its uptrending 25-day moving average, so technically, the picture is bright.

Looking at the big picture, and thinking way back to the debut of those vinyl records, here’s what I see.

With every major new music technology, a new corporate name took precedence.

When tape came along, you didn’t see Columbia leading the way. They were defending their position in vinyl!

And when digital music on your computer came along, you didn’t see Sony leading the way. They were busy defending their position in CDs!

So as we transition from the in-computer digital music era to the cloud-based era, history tells me Apple isn’t going to execute the transition well. That doesn’t mean that Apple will fail; no doubt they will hold onto many users who are too entrenched in their habits to change.

But Pandora has a great start in the Cloud-based music paradigm, and thus the odds are that Pandora will be the leader in the years ahead. For more information, click here.