Pandora (P) has been one of the biggest success stories of the last year or two.
But lately, there have been some issues weighing on Pandora stock as the company struggles to keep up its growth and to keep Wall Street sentiment as bullish after this big run.
And unfortunately, investors need to be prepared for more trouble as the streaming radio giant sees momentum level off.
Here’s what’s going on with Pandora stock right now, and why further declines are likely.
Pandora’s Strategy Quandry
In February, Pandora named a new Chief Strategy Officer in Sara Clemens, a former Microsoft (MSFT) executive with experience taking the Xbox from just a home-grown video gaming console to a multimedia entertainment hub used around the world.
The move makes sense. Clemens is a natural fit to advance Pandora’s mission of getting its service on all manner of devices — including smartphones and tablets but also alternative platforms like Xboxes, TVs and even in car dashboards. Easy integration of Pandora via apps and other similar services are crucial to expanding the music service’s reach.
What’s painful about the hire, however, is that Pandora founder Tim Westergren was holding the CSO title before… and was demoted to simply “founder” after Clemens’ hire.
Why? Well, here’s where it gets sticky… but bear with me:
Pandora is unique among streaming radio companies because it’s set up under U.S. digital radio guidelines instead of dealing directly with record labels like competitors Spotify and iTunes Radio from Apple (AAPL). Without getting too complex, Pandora pays a per-song royalty while other streaming options like Spotify negotiate batches of songs and albums from labels — much in the way Netflix (NFLX) does deals with studios. Recent examples include the recent Netflix agreement with Disney (DIS) for its Clone Wars series, or its big 2013 deal with Dreamworks Animation (DWA).
Clemens’ international experience with the Xbox platform has potential, but the Pandora model is designed around U.S. internet radio law and subsequent royalty rates that are in force. It’s already been enough of a headache to navigate this royalty structure at home considering Pandora’s recent battle over the so-called Internet Radio Fairness Act. Taking that model overseas would be a big mess.
But that’s what Pandora has to do if it wants to grow.
Even if it means upending the current business, opening up the potential for future costs… and with no promise that any of these changes will actually allow it to fend off tough competition from Spotify, iTunes Radio and others abroad.
Risky, to say the least.
Pandora Listener Metrics Signal Trouble
This is enough uncertainty for investors to have to stomach. But at the same time, Pandora has been showing slowing growth in its domestic business… and has decided to shut down its monthly disclosure of listener data to boot.
Pandora listener metrics for February, released a few weeks ago, showed slower growth and a drop in the total number of music hours. Sure, February is a short month and there are excuses to be made… but considering the hype and expectations, even a plateau for listeners is a bad sign.
Pandora’s rate of growth is undeniably flattening out. February’s growth rate was almost 9% over the previous year, January’s growth rate was 13% as was December’s rate, and November and October data showed a growth rate of 18%.
But worse is that Pandora will discontinue its monthly audience metric reports in a few months. Pandora claims advertisers (and I guess investors) have plenty of other tools out there to figure out what’s what regarding its streaming audience… but less information is never a good sign.
It all adds up to a rather uncertain outlook for Pandora stock.
Sure, Pandora is still up an impressive 120% the last 12 months despite a deep sell-off in March. But to me, that’s a sign that you still have time to take the money and run.
I believe in streaming radio, and I’m actually a regular Pandora user.
But as for the stock? I say steer clear.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.