Streaming music service Pandora lost almost one-quarter of its stock market value Wednesday after telling investors that it doesn’t expect to make money for at least another year. Pandora’s struggles illustrate the difficulty that the mostly-free, online ad-supported music service faces nearly one year after going public in a high-profile initial public offering.
Pandora, which recommends music based on user playlists, continues to face a fundamental challenge: generating enough revenue to offset the fees it must pay the major record labels for the right to stream songs to its users. That’s one of the main reasons the company has yet to generate a profit over the course of a full year, despite the fact that it now streams over one billion songs every day, according to company executives.
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Making matters worse, Pandora is operating in an extremely competitive industry: online music. In addition to traditional and satellite radio, the company faces competition from Apple’s iTunes as well as music services from highly profitable Internet giants Google and Yahoo. As if that wasn’t enough, Pandora has recently has to grapple with a new rival, Spotify, the web music service that struck a key partnership with social networking giant Facebook last year.
After saying that this quarter’s loss would be drastically worse than Wall Street analysts had expected, Pandora shares fell nearly 24% percent Wednesday to $10.86. The company began selling shares to the public at $16 last June.
Citigroup analyst Mark Mahaney issued a note Wednesday downgrading Pandora to “neutral” from “buy,” after initially recommending the stock following its IPO. “That call clearly hasn’t worked,” Mahaney wrote. “As a speculative buy – with no profitability track record and no near-term profitable outlook – Pandora always carried very little margin for error. And now there’s error.”
Others, including JP Morgan’s Doug Amnuth, said that Pandora’s overall prospects remain solid — even if the horizon has been extended — and suggested that the hit the company’s shares took Wednesday could present a buying opportunity.
“Profitability levels are essentially pushed out in our model by 1 year, but we continue to believe Pandora is a compelling long-term play on mobile advertising and we’d be taking advantage of current weakness in the shares,” Amnuth wrote in a note to clients.
Amnuth is probably right: In the long run, the opportunity presented by online streaming music is truly massive, and Pandora is very well positioned to capitalize on it. But in this case, long-term may be too long to wait for some stock market investors.