We compared Pandora (P) with Sirius XM (SIRI) and terrestrial broadcast giant Cumulus Media (CMLS), since most of the other companies are unlisted subsidiaries of large corporations such as Google’s Play Music All Access, Clear Channel (CCMO)’s iHeartRadio, and Apple’s (APPL) iTunes Radio. Peer Spotify is yet to be listed.
Cumulus appears to be the cheapest of the three with an 18.1x P/E. Satellite radio giant Sirius XM is facing competition in the automobile space with the entry of Pandora and Apple’s CarPlay. Shares saw an impact on the news that iTunes Radio reached a deal to stream National Public Radio. Sirius XM has 25.6 million subscribers and broadcasts commercial-free music, premier sports talk and live events, comedy, news, exclusive talk, and entertainment. It currently trades at a P/E of 37.5x. Sirius expects adjusted EBITDA growth will continue to exceed 20% in 2014 with investments in new products and technologies such as connected vehicle services business that was acquired from Agero. It said free cash flow will approach $1.1 billion, and expects net subscriber additions of 1.25 million and $4.0 billion revenue in 2014.
Pandora’s valuations are considered lofty at a 175.4x forward price to earnings ratio considering the company has struggled to earn profits. The stock is up more than 200% since 2013. Although growth catalysts include targeted advertising initiatives, in-car and mobile advertising, and international expansion, increased competition from new entrants in the space and rising royalty-related costs continue to challenge. Pandora is a part of Global X Social Media ETF (SOCL) that seeks to mirror the investment returns of the Solactive Social Media Index, which tracks companies involved in social networking, file sharing, and other web-based media applications. The ETF is down 14% YTD following a sell off in social media stocks.
A study by Generator Research titled Digital Music Subscription Services: 2013 cited by hypebot suggested that subscription music services like Spotify and Pandora are on track to double by 2017, but will never turn a profit. The analysis noted that the obstacle to profitability for streaming music is the 60-70% of revenue each service pays to labels, publishers, and artists. The report said survival solutions may include sale to a larger company with more resources or inclusion of value added services similar to iTunes Match from Apple.