Pandora Media Inc (P) Just Admitted Its Business Model Is Broken

So, what is the problem? There are three issues I’ve identified. First, Pandora Media Inc (NYSE:P) can’t see to stop issuing new shares. At the beginning of 2012 they had just over 162 million shares. By the end of 2012, the share count had risen 5.3% to 170.89 million. The company says by the end of the first quarter they expect to have 174 million, and by the end of the year at least 176 million. This share growth means even if the company becomes profitable on a net income basis, their earnings per share is being constantly diluted.

The second issue is, Pandora’s content acquisition costs are rising faster than revenue growth. This is the core of Pandora’s issue, they can’t tell users to only listen to a certain amount of music. With listener hour growth of 53%, this caused the company’s content acquisition costs to rise by 59%. When the cost to provide your service grows faster than revenue, the business doesn’t make sense.

Third, Pandora is bleeding cash. If you look at what I call core operating cash flow (net income + depreciation), Pandora’s core cash loss increased 88% on a year-over-year basis. By comparison, Sirius saw an over 400% rise in core operating cash flow, Netflix saw an increase of 61.41%, and Amazon reported an increase of 23.69%.

The bottom line is, Pandora Media Inc (NYSE:P) can keep growing, but their business model is broken. The company already has an “8% share of total U.S. listening” and can’t make money. With content acquisition costs rising faster than revenue, this isn’t likely to change anytime soon. Investors looking for a play on the streaming market should consider Sirius, Netflix, or Amazon.com, Inc. (NASDAQ:AMZN). At least these three companies have a model that works.

The article This Company Just Admitted Its Business Model Is Broken originally appeared on Fool.com.

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