3 Reasons Someone Will Buy Pandora Soon

By Markets Fool.com

Image source: Pandora Media.

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The third quarter was hard on Pandora Media (NYSE: P). The music-streaming pioneer is clocking in with year-over-year revenue growth of 13%, making this the worst period of growth in its tenure as a publicly traded company.

The real portrait is worse than that. Pandora's relatively new ticketing service padded top-line growth. Pandora's two flagship revenue sources -- online advertising and subscription revenue -- rose 7% and dipped 1%, respectively.

Pandora's listener base continues to shrink, and as the former market darling notches its seventh straight quarter with an operating loss, it will be hard for it to woo investors. FBR Capital and Albert Fried downgraded the stock; SunTrust lowered its price target.

One would think that a rough quarter, analysts lowering their expectations, and growth prospects dwindling would make Pandora less of the takeover candidate that it was dolled up to be earlier this year, but that's not necessarily the case. Let's go over a few of the reasons why Pandora may be acquired sooner rather than later.

1. Pandora is still popular

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Pandora had 77.9 million active listeners at the end of the third quarter, less than the 78.1 million it was entertaining a year earlier. The defections have been slow, and once again we find listener hours on the rise: Listeners streamed 5.4 billion hours, 5% more than a year earlier. The base is gradually shrinking, but those that stick around are leaning on the platform more.

The Pandora brand remains the most recognized moniker in streaming music. It's also hard to deny the appeal of 77.9 million active listeners who are listening to, on average, more than 23 hours each month.

2. The lower the price, the more attractive the buyout

Pandora's unflattering quarter finds the stock moving lower again: Late into Wednesday's trading day, it dipped below $12. This summer The Wall Street Journal reported that the majority stakeholder in Sirius XM Radio (NASDAQ: SIRI) offered to buy Pandora for $15 a share; Pandora rebuffed the offer. It was holding out for more, but obviously that never happened.

It's easy to see why pairing Pandora with Sirius XM would be an interesting match. Sirius XM is the only game in town when it comes to satellite radio, and it has 30.6 million subscribers. Pandora has a larger base on a platform where Sirius XM has failed to gain traction, yet Pandora has also failed to turn freeloaders into paying subscribers the way that Sirius XM has over the years.

When Pandora was moving higher and its stock was breaking into the low teens, it's easy to see why $15 would have seemed too low. How many current shareholders would jump at the chance of an exit strategy at $15 now? A pairing of Sirius XM and Pandora would raise antitrust eyebrows, but it's not the only logical buyer now that Pandora is out of favor, with its shareholders more than a bit frustrated.

3. Pandora's now ready to fight the on-demand battle

Pandora's main offering is a music discovery service: Folks hear songs and playlists based on what they already like to hear. But it's not the on-demand platform that Spotify and tech giants are now championing as premium services.

Pandora is finally throwing its hat into this ring, and has been inking the necessary direct licensing deals in recent months. Entering this highly competitive market may seem dangerous, but it also makes it more tempting for a potential buyer that may already be in the niche. If Pandora succeeds, it will not only be on top of the world -- with a buoyant share price to boot -- but it will also be that much more disruptive to a competitor hoping to acquire it.

Another company should buy Pandora now, before it finds out if it can port many of its nearly 78 million listeners over to an on-demand service. A successful Pandora would be an unstoppable force with no reason to entertain buyout offers. For potential suitors, it may be now or never.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.