The latest quarterly figures from Pandora Media sent the stock price lower, but long-time critic Rich Greenfield at BTIG Research is telling clients the stock is way overvalued. He’s sticking with his $3.75 price target and telling clients they should short the stock.
Make no mistake about it, Greenfield says consumers love Pandora. “It is free and has very limited advertising, which makes for a great user experience,” he said in a research report this month. But he notes that usage is growing faster than advertising, and Pandora has to pay music royalties for each song played, so those royalty costs just keep going up. “The result is a great consumer product, just not a good business,” the analyst wrote.
What is the problem? According to Greenfield, “Pandora is a poor advertising medium.”
“While advertisers continue to ‘experiment’ with Pandora, given its early move into mobile and its ability to run cross-platform mobile/PC ads, we believe advertisers are making a mistake advertising on Pandora. Radio is a passive activity and Pandora’s listening hours are increasingly occurring in the background – for example sticking a smartphone on an in-home dock and walking away, running at the gym with a smartphone in your pocket, a smart TV playing Pandora with the TV off. We believe display ad dollars and video ad dollars are being squandered and that Pandora will need to survive on audio ad dollars, which have far lower CPMs than their current multiplatform ad units. Brands will have far better ways to reach consumers on mobile devices in the coming 12-24 months than via Pandora and other mobile music/audio services,” said the analyst. Click here to read Greenfield’s report.
He also worries that engagement will fall as Pandora’s user base ages, more in-car listening means less impact for display and video ads – and a coming threat from Facebook as a mobile advertising competitor. Also, he notes, Clear Channel’s iHeartRadio, Spotify and other music streaming competitors are growing and won’t go away.
“Pandora’s fundamental problem is that they are not offering enough ads per hour, given the mix shift to mobile audio CPMs. And, Pandora cannot even effectively sell all the inventory they have today. Yet, to drive profitability, Pandora needs to significantly increase ads units/hours. This will not only damage the consumer proposition of Pandora, but will add to the glut of inventory,” said Greenfield. “We wonder whether Pandora will ultimately change its focus from its free ad-driven product to its Pandora One subscription product,” he concluded.
