The music industry is known for being cutthroat, and the online music fray where Pandora Media (ticker: P) carves its niche is no different. The web-based music service has faced serious blowback as new players — including Apple (AAPL) — enter the space, challenging Pandora’s plans for a larger piece of the online music pie.
This trend forced the company’s founder Tim Westergren to return to Pandora to serve as CEO, led to a 42 percent drop in the stock price over the past year and now has activist investor and hedge fund manager Corvex Management’s Keith Meister calling for the online service to put itself up for sale.
Yet, others argue that Pandora is due for a turnaround and can build on its user base of 80 million listeners.
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Is it really time for the second-most engaged mobile media platform — behind only Facebook (FB) — to turn down the volume and let some other company manage it? Or is there hope for an encore for P stock?
The on-demand platform holds the key for the future. Pandora reacted slowly to on-demand music platforms. As services like Spotify grew in popularity — it now boasts more than 100 million users — Pandora held firm to its radio-service style, not allowing users to pick specific songs when they wanted. But that’s set to change.
Last year, Pandora bought the assets to the defunct on-demand music channel Rdio for $75 million. It plans to use the technology in Rdio to build its own on-demand platform by the end of the year.
“Pandora has to make sure that it comes up with a competitive product,” says Michael Graham, an analyst with New York investment bank Canaccord Genuity. “It has got a ton of data about what listeners like to listen to. The focus on the music discovery process is essential.”
Pandora will use the data that it has gathered from its large user base to help streamers naturally discover music on its on-demand service. The idea will be to create serendipitous moments for users in discovering new songs and artists.
Graham says Pandora can still catch up to Spotify — there’s room for at least two or three on-demand music services in the market, he says. But the key will be getting licensing from music labels at a cheap price.
Pandora is chasing the opportunity in the subscription model that Spotify — which nears 30 million monthly paid subscribers, according to reports — has used for monetization and growth. Pandora currently gets only 19 percent of its revenues from subscriptions. “It’s a process of exposing those listeners to the new service and winning over subscribers,” Graham says.
The likelihood Pandora goes up for sale seems small. Cotvex’s Meister, which has a nearly 10 percent stake in the company, is calling for Pandora to place itself on the block. Pandora executives had previously considered a sale, but opted to hire Westergren instead to turn around the company.
Meister believes a buyer could pay a substantial premium to the current price.
With “all of the convergence in the space right now, (it makes) a ton of sense,” says Macquarie Securities analyst Amy Yong. She sees the possibility of Pandora potentially attracting buyers outside the music space, similar to how Verizon Communications (VZ) is interested in purchasing Yahoo’s (YHOO) Internet business.
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But Westergren doesn’t appear ready to let go of the company he just rejoined. He has set up a plan increase sales from $1.16 billion in 2015 to $4 billion by 2020. A big part of this plan is developing a viable on-demand music service.
Pandora must also cut further into the $15 billion AM/FM radio advertising market, Yong says. If it could get 10 to 15 percent of this market, then P stock would be “a home run” with or without a sale, she says.
Such efforts make a sale of the company unlikely — at least for now. “Next year, a sale is more likely than this year,” Graham says.
Pandora’s fast user growth has probably ended. User growth for Pandora increased by only 0.3 percent in the first quarter. It has reached the “end of the rapid growth (phase) in terms of adding new listeners,” Graham says.
That’s why it’s looking for new strategies for growth, such as Ticketfly, which it purchased last year for $450 million. The Ticketmaster-like service works with more independent musicians to sell tickets and market shows. Pandora can incorporate the service into its database, so when an artist performs in a city, the company can target every Pandora user that has the artist’s radio station in the area. Yong sees the buy reaching $93 million in revenue by 2018.
There’s plenty of upside if the initiatives take hold. There’s no doubt that Pandora stock has taken significant steps back. Since its peak in February 2014, Pandora stock has fallen 74 percent. Monetization has been difficult for Pandora, as well as other players, because of the fees that are provided to the music labels and artists. It creates razor-thin margins.
That’s why advertising still accounts for 80 percent of revenues. The on-demand efforts are in order to encourage more subscriptions, which would provide more predictable revenues for Pandora moving forward. Graham has a target of $14 for Pandora stock — a 40 percent upside to the current price tag — due to his belief that the efforts will be successful.
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And, on the plus side, if a sale does occur, then investors could see a jump in price from that as well. That’s a tune anyone would stream.
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4 Things to Know Before Streaming Pandora Media Stock originally appeared on usnews.com
