Pandora Media, Inc. (NYSE:P) with its market capitalization of 3.89B provides internet radio services in the United States. The Company offers radio services on smartphones, tablets, traditional computers and car audio systems, as well as a range of other internet-connected devices. Pandora has had a largely tumultuous experience in the last one year as the stock plummeted from a $37 share price and $8B valuation to the current $18 share price and $3.89B valuation. This piece seeks to explore how the storm has passed and it provides insight on how we can expect a turnaround in Pandora going forward.
Before digging into the crux of the article, I think it is expedient to acknowledge the fact that many of the Pandora bears are worried about the proposed increase in streaming fees by The Copyright Royalty Board. The CRB is trying to increase the royalty fees that webcasters such as Pandora will pay to record labels and a court case to that effect will begin in May. Pandora currently pays $0.13 to $0.14 per 1,000 songs and the CRB is trying to obtain between $0.20 and $0.30 per 1,000 songs – a move that will significantly erode Pandora’s revenue.
However, what many of the Pandora bears have failed to acknowledge is that the CRB headache is not restricted to Pandora alone. Rather, all the players in the music streaming service space will be affected by the proposed increase in rates. Interestingly, Pandora occupies a vantage position to survive the rate hike (that’s if it is not more than $0.20 per 1,000 songs).
To start with, one of the reasons Pandora occupies a vantage position in the music streaming industry is its immense popularity. Pandora is the most popular music app in the iOS App Store, it is the #7 most downloaded music app overall and it is the top #3 grossing app between April 21, 2014 and April 20, 2015.
In addition, research by Edison Research shows that Pandora is the top internet-only radio station by brand awareness as shown in the image above. The brand recognition speaks volumes about Pandora’s ability to attract online advertisers who would love to reach its growing audience.
Mind-blowing Growth and Momentum
Speaking of growing audience, Pandora has shown impressive growth and momentum metrics from the time of its IPO until date. The importance of a growing audience to webcasters cannot be overemphasized because that is another important revenue source for the company. Pandora boasts of 81.5 million active users and RBC Capital Markets have estimated that 51% of all North American internet users listen to Pandora.
The image above shows the important growth metrics that Pandora has recorded from the time of its IPO until the end of Q4 2014. The company’s registered users climbed 150% from 100M at IPO to 250M at the end of the fourth quarter and its quarterly revenue climbed 300% from $67.0M at IPO to $268.0M at the end of the fourth quarter.
How to Trade P Options by the Numbers
The company financials support my assertion that impressive growth metrics can easily be translated into financial gains for the benefit of shareholders. In the recently reported quarter, (Q1 2015) Pandora beat that consensus estimate when it reported revenue of $230.76M, higher than the consensus of $223.8M and it marks a 28.1% year-over-year increase. Earnings are still in the red, but it came in at ($0.12) better than the consensus of ($0.16).
From the foregoing, investors’ confidence in Pandora should be restored in the short to medium terms and a decent Q2 result should see its share price rising significantly. Pandora has Zacks Style Scores of “A” on Growth and Momentum to suggest that the stock is in an uptrend; hence, I recommend buying P call options. You should consider buying the P Sep 2015 20.000 call (P150918C00020000) at an asking price of $1.49.
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