If you listen to any streaming music service – and don’t pay for the privilege – you’ve likely noticed the occasional commercial interrupt your experience.
Well, for Pandora Media Inc (NYSE:P), at least, it turns out that those ads are performing quite well…
A survey released on Friday morning by OTR Global indicates that advertising firms were pleased with the overall performance of ads placed on Pandora. And 17 agencies indicated they intend to “significantly” boost their ad spending on Pandora’s streaming music service in 2015.
This comes on the heels of a 90% year-over-year increase in ad spending on Pandora in Q4 2014.
Investors took kindly to the news, driving shares up 10.4% on Friday. Should you follow the herd on this one?
Shares have lost more than 47.7% in the past 12 months. And as you can see from the chart below, the stock sits just above its 52-week low of $15.26, which was reached about a week ago.
And with Pandora’s earnings scheduled to be released on February 5, this news likely has some investors wondering if they should get in ahead of any more exciting developments that may be revealed next week.
Don’t hold your breath…
Taking a Look Back at Q3
Granted, the company’s Q3 2014 report does indicate some relative strengths.
The company reported total revenue of $239.5 million in Q3 2014, a 41.5% increase over the $169.3 million reported a year earlier.
Advertising revenue was $194.3 million (a 44% increase over Q3 2013), while revenue from subscriptions and other areas came in at $45.3 million (a 25% increase on a non-GAAP basis).
The company also saw its total mobile revenue grow to $188 million, a 52% increase on a GAAP basis.
But the company faces some challenges, which will likely have a greater impact than any strengths.
And this will make a higher stock price for Pandora more difficult to achieve for investors.
Troublesome Signs We Can’t Ignore
Pandora is seriously struggling to grow its core business.
The Q3 2014 report barely mentions the disappointing trends in active users and listening hours the company has seen…
Active Pandora users only grew from 76.4 million in Q3 2013 to 76.5 million in the same quarter in 2014. That’s a measly increase of one-tenth of 1%!
Meaning that the company’s growth in active users amounted to nothing more than a rounding error for the company.
On the other hand, listening hours actually dropped for Pandora, falling from 5.04 billion hours to 4.99 billion hours.
Now, early last year, shareholders had hope that a suitor, such as Google Inc (NASDAQ:GOOGL) or Apple (NASDAQ:AAPL), might be interested in acquiring Pandora in an effort to gain an instant customer base.
Unfortunately, the M&A rumors inflated the share price, potentially scaring away any buyers.
As of now, the potential for a Pandora buyout is all but non-existent.
This leaves Pandora to stand alone against a growing number of competitors that have virtually unlimited resources.
Companies like Spotify, Apple, Amazon.com (NASDAQ:AMZN), and Google are gearing up to grab their share of this market, making this a war that Pandora is unprepared to fight.
So enjoy the music while you can. Just avoid the stock. Shareholders will be singing a different tune in very short order.
Good investing,