It's fair to say that Pandora (NYSE: P) is out of favor these days. The digital-music pioneer hit all-time lows earlier this week, after posting uninspiring quarterly results. With its user base gradually shrinking, it's easy to see why investors are steering clear of the former market darling.
Some say you'd have to be crazy to buy into a company with reeling fundamentals, but that's exactly what I did a few days ago. I became a Pandora shareholder early last week. I'm not in denial. I know that Pandora's going through a rough patch, and with losses widening for the fifth consecutive year, a turnaround doesn't appear to be coming anytime soon.
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So let me go over a few of the reasons I chose to buck the conventional wisdom by adding Pandora to my portfolio.
1. The stock hasn't warranted its big selloff
Shares of Pandora are trading 87% lower than their peak three years ago. Active listeners are nearly 10% below their late 2014 peak, and listener hours have slipped 4% since topping out last year. But these gradually decaying metrics don't warrant an 87% sell-off.
It's true that the upside isn't as clear as it was when the stock peaked in early 2014. Premium on-demand streaming platforms are all the rage, and Pandora's late entry makes it a distant third in that particular niche. On the other hand, trailing revenue is at a record level, as higher ad rates and a healthy surge in premium subscriptions have offset the negative retention trends.
2. Don't sell millennials short
A big knock on Pandora is that its audience consists mostly of penny-pinching youngsters. A whopping 93% of its 73.7 million active listeners tune in for free, willing to put up with ads and other limitations for access. Just 5.2 million of its users are premium subscribers, though that figure is improving.
It's hard for advertisers to reach millennials these days, as young folks aren't consuming traditional linear television or radio. So marketers are flocking to Pandora to get their pitches heard. Ad revenue, accordingly, continues to outpace usage -- growing slightly in the latest quarter despite a decline in audience -- as ad rates move higher.
3. Pandora's a compelling buyout candidate
Sirius XM Radio (NASDAQ: SIRI) reportedly made an offer to acquire Pandora for $15 a share last year, eventually settling for a 16% stake at a lower price point a few months back. Sirius XM isn't under any kind of pressure to buy all of Pandora, but it's not the only potential acquirer. Tech giants that have stumbled to take on Spotify and wireless carriers hoping to set their platforms apart are just some of the companies that would be better off with Pandora on their side.
Sirius XM can always step up to buy all of Pandora with the price so low. It won't need to go as high as $15 anymore. However, the same argument can be made of at least a half-dozen hungry companies with deep pockets. If Pandora fails to turn things around, investors can still win if a buyout comes at the right price.
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