The tech world is slowly but surely catching onto the fact that when it comes to online content, the future is not in downloads or torrents, but in streaming. For a quickie illustration of this, take Netflix’ (NFLX) growth over the last two years. Even with a value pullback this quarter, Netlfix has recorded a 408-percent stock return since 2012. Not too shabby.
This is not to say that there’s no place for digital downloads services. That sort of content has certainly done well enough, as there’s no question that Apple, Inc. (AAPL) has turned a pretty penny with their dollar-a-song iTunes.
The future of how music listeners get their songs though clearly favors streaming. But for every iTunes there’s a Spotify, there’s a Soundcloud, there’s an Rdio, not to mention scores of inventive start-ups. And there’s the oldest, biggest, and arguably most valuable of all the streaming services, the $5.4 billion market cap Pandora (P) .
Why, it's Radio on the Internet!
As the only streaming music service to trade publically, Pandora has often grabbed the lion’s share of the attention from investors. And the market has responded favorably, rising in value 144 percent from its share price two years prior.
Pandora’s Music Genome Project, which attempts to tailor a radio station based on a user’s preferences, has always been the main selling point for the company. And as first on the streaming scene (at least on a large scale), they’ve always done gangbusters.
Except in one key area: earnings. Pandora has never made much money. To be sure, we’re talking about tech here, so earnings and value always don’t have to mesh neatly. But Pandora has always been one to truck on surprises and projections, and those sunny predictions are starting to look a little cloudier.
Going through the company's earnings history reveals a worrying trend. For fiscal year 2012, the company lost $0.02 a share while projecting a loss of $0.11 to $0.16 the next year. They scored a major surprise in 2013, turning a non-GAAP profit of $0.06 on the year. They projected that for 2014, this profitability trend would continue, notching earnings of $0.13 to $0.17 a share on revenues of $870 to $890 million.
But then the first quarter of 2014 happened, and Pandora returned to their unprofitable ways. The company’s revenues were below projections at just $194 million, and the earnings were way off, at a $0.14 a share loss. Better than the $0.22 a share loss the year prior, but still, far from actually making money.
Pandora was losing its luster. It’s still on the streaming cutting edge, to be sure. But with the rise of the Spotifys and the Rdios, they’re starting to lose market share. And their next growth point remains unclear.
It’s the On-Demand, Stupid
Let’s return to Netflix. One of the reasons Netflix has been so successful isn’t just because it’s a streaming service. They’ve succeeded because they’re an on-demand streaming service. They do for movies and TV shows what Rdio, Soundcloud, and Spotify do for music.
Pandora defends their model’s viability as allowing users to discover new music. Spotify countered with their own radio feature. Not to mention, as the decline of TV ratings and the rise of Netflix proves, people care less about having things they might like thrown at them than by actually picking the content they consume themselves.
Since the disappointing earnings and guidance, shares of Pandora have slid. And from technical standpoint, they look to continue doing so. Pandora’s price movement is testing the bottom of a descending triangle, meaning they are poised to break down even further.
Barring some kind of technological breakthrough, the competition looks to intensify, and the likelihood of Pandora once again realizing profitability looks dim indeed.Shares of Pandora have slid 35.03 percent in the quarter following the earnings disappointment. At the conclusion of the May 19 trading day they were priced at $25.03 a share.