Pandora Execs Cash Out

• Pandora insiders have sold around 2.13 million shares of the company’s stock in the last six months.
•  
• During the same period, insiders did not purchase a single share of Pandora stock.
•  
• Those selling the stock include Chief Revenue Officer John Trimble, who sold 40,000 shares and 40,000 options on Sept. 2, 2014.
•  
• Pandora reported a net income of -$50.15 million on June 30, 2014.
•  
• A lawsuit could require Pandora to pay tens of millions of dollars in additional royalties to record companies.

Executives at Pandora Media (P) have finally figured out how to generate some cash from the streaming music service by selling their stock and stock options. Yahoo Finance reported that Pandora insiders have sold around 2.136 million shares in the last six months, but have not purchased a single share.

One of the biggest sellers was Chief Revenue Officer John Trimble, who sold 40,000 direct shares at $27.44 a piece on Sept. 2, a transaction worth $1.097 million, according to Yahoo. Trimble also sold 40,000 options with an undetermined value on the same day.

Financials Show Pandora is Not Making Any Money

Cynics will say that Pandora executives are cashing out of a company that cannot make money. Recent financial data shows that the cynics might be right; unlike its main competitor Sirius XM (SIRI), Pandora is not making any money.

Pandora reported a net income of -$50.15 million on June 30, 2014. Sirius reported a net income of $342 million on the same day. Pandora also reported a free cash flow of -$11.67 on June 30, 2014, while Sirius reported a free cash flow of $310.87 million on the same day.

To add to its troubles, Pandora reported a return on equity of -14.92% on June 30, 2014. Sirius reported a return on equity figure of 13.12% on the same day. That figure is made more dismal by the fact that Pandora has not reported a positive return on equity figure since July 2011.

These figures call Pandora’s whole business plan of distributing streaming music online into question. The company cannot make money, even though it has around 70 million regular users. One reason why it isn’t making any money is that Pandora has no way of charging those users for its service. Pandora’s business model basically consists of paying for music and distributing it for free.

Sirius, which has around 26 million users, makes money because of its subscription based business model, which gives the satellite company a lot of float. Sirius reported a TTM revenue figure of $3.99 billion on June 30, 2014, while Pandora reported a TTM revenue of $750.94 million.

That leaves Pandora reliant on advertising revenue, which has no float. Advertising is not guaranteed; it can go away at any time, unlike subscription fees, and it is dependent on sales.

Pandora Could be on Shaky Ground Legally and Financially

It also leaves Pandora vulnerable to Black Swan events and other outside shocks. One such shock is the lawsuit that four record companies, Sony, Universal, Warner Music, and ABKCO, filed against the streaming music company in April. The record companies are alleging that Pandora violated copyrights on some of their music by playing songs recorded before Feb. 15, 1972. The plaintiffs are arguing that songs recorded before then are covered by state and not federal copyright law, which allows them to sue.

If the suit succeeds, Pandora might have to pay the record companies tens of millions of dollars in royalties, The New York Times Dealbook feature reported. Music potentially covered by the suit includes songs by the Beatles, Bob Dylan, and the Rolling Stones.

It is easy to see why Pandora executives appear to be cashing out. Their company appears to be on shaky ground both legally and financially.