Pandora Media Inc (P): This Household Name Has Not Yet Proven Itself

The disparity between desktop and mobile is discouraging, as it shows that the mobile world is simply not as profitable as the desktop reality that defined the previous decade. Pandora must increase its revenue per 1000 listener hours in order to overshadow the rising cost of content (roughly $19 per 1000 listener hours).

Differentiation and rising competition

These facts leave out another key component to the discussion surrounding Pandora —  competition. Sirius XM Radio Inc (NASDAQ:SIRI) is only one of many competitors that Pandora faces.

Sirius XM Radio Inc (NASDAQ:SIRI) is an interesting example, as it has been able to achieve incredible profitability. This is in large part because the company has a clear revenue stream (from customers) based upon its differentiation through its unique content. Sirius XM Radio Inc (NASDAQ:SIRI) has achieved profit margins of nearly 14%; this strength has come from a differentiated customer proposition based upon unique content. Pandora does not have this unique customer value proposition and thus faces competitors such as Spotify and Slacker that have each aimed to take a piece of Pandora’s business. Although Pandora has been able to grow its market share in recent quarters, the future will be a more competitive world for Pandora. The need for differentiation is apparent.

P Market Cap data by YCharts

Conclusion

For investors, this does not point to a failing company or a company that in two years will be dead in the water. Rather, these facts illustrate that, for Pandora to transition from a “trade” to an “investment” that can be made with relative confidence, the company will need to control costs and grow revenue at a rate where profitability is not a future prospect, but rather a current reality.

Investors should be cautious of Pandora Media Inc (NYSE:P) in its current operating structure, as it has not yet shown its ability to reach profitability. The coming quarters are vital for Pandora, for they will show whether Pandora is currently in the stage of scaling its business or whether the company is far away from profitability.

The article This Household Name Has Not Yet Proven Itself originally appeared on Fool.com and is written by Justin Weinstein.

Justin Weinstein has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Due to the uniqueness of each investors needs, Justin Weinstein is not advocating the purchase of sale of any stock mentioned above. Justin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.