Sirius and Pandora are trying to do what could be impossible to make Mr. Market respect audio entertainment.
Today’s market places very little value on audio entertainment. For example, Sirius XM Holdings Inc. (NASDAQ: SIRI) shares were trading at $6.22 on 9 October 2018. Not even 33.49 million Sirius XM subscribers in 2nd Quarter 2018 could get Mr. Market’s respect.
Meanwhile, Pandora Media Inc. (NYSE:P) was trading at $8.97 a share on 9 October 2018. Conversely, Statista estimates Pandora had 75.9 million active listeners in 2018.
Sirius and Pandora could have 109.33 million listeners
Therefore, it is easy to see why Sirius is buying Pandora. A combined Sirius-Pandora could have 109.33 million listeners. On the other hand, Sirius and Pandora’s biggest competitor Spotify has around 58.5 million listeners in 2018.
Moreover, Spotify will not match Pandora’s listener base soon. Statista; for example, calculates that Spotify will have 76.7 million listeners in 2022.
Impressively, Sirius and Pandora will have an audience over four times as large as network television’s. To demonstrate, Nielsen estimates that all five broadcast TV networks had a combined audience of 26.8 million on 11 September 2018. Notably, the most popular network, NBC had just 7.8 million viewers in the first week of September.
Are Sirius and Pandora a Value Investment?
Value investors will be interested in Sirius and Pandora because of the low price and huge audience. Under these circumstances, we have to ask will Sirius and Pandora make money?
In Pandora’s case the answer is no. For instance, Pandora reported a net loss of -$99.45 million and an operating loss of -$94.14 million for 2nd Quarter 2018. Markedly, Pandora generated $384.79 million in revenues and a gross profit of $125.21 million for 2nd Quarter.
In addition, Pandora recorded a negative free cash flow of -$50.94 million, a negative operating cash flow of -$49.36 million, a negative investing cash flow of -$111.34 million, and a negative financing cash flow of -$2.29 million for the same period.
Obviously, Pandora is incapable of making money from its operations. Pandora is losing money because it has to pay for almost all of its content music.
To make matters worse, Pandora gives the music it pays for free away online. By and large, that is a great deal for stars like Beyonce, whom Pandora pays for the privilege of promoting her songs.
Is Sirius XM Making Money?
Conversely, Sirius XM is making money from its subscriptions. For example, Sirius reported a gross profit of $795.63 million, an operating income of $361.63 million, and a net income of $292.35 million on June 30, 2018.
Importantly, Sirius recorded an operating cash flow of $579.42 million and a free cash flow of $486.55 million on 30 June 2018. Sirius is generating cash flow because it charges subscriptions for its services.
Consequently, Sirius’s subscription based business model works and Pandora’s “business” of giving music away loses money. To demonstrate, Sirius charges subscribers $10.99, $15.99 or $10.99 a month for audio.
The subscriptions generate float or extra cash Sirius uses to expand its operations. For instance, Sirius is able to hire big stars like Howard Stern to produce exclusive content.
Unfortunately, Sirius has little money left over after paying Howard. In particular, Sirius XM recorded just $63.52 million in cash and short-term investments on June 30, 2018.
Conversely, Pandora reported $293 million in cash, $127.79 million in short-term investments, and $420.79 million in cash and short-term investments on 30 June 2018. Thus it is easy to see why Sirius wants Pandora, to get its hands on that extra cash.
Are Sirius and Pandora a Value Investment?
The Sirius and Pandora combination will be the world’s largest audio entertainment company, a press release claims.
Sirius Pandora will not be a value investment because it could limit its moneymaking capacity. For instance, the Sirius XM subscriptions are apparently the combination’s only revenue stream.
Pandora is supposedly developing an ad-supported streaming option. Unfortunately, there is no evidence that people will listen to the ads.
Then again, streaming audio subscription services are popular. Apple’s (NASDAQ: AAPL) iTunes had 50 million subscribers worldwide in May 2018, Statista calculates.
Can Sirius and Pandora compete with Apple iTunes?
On the positive side, the ad-supported streaming could drive listeners to Sirius’s subscription service. On the negative side, ads could send listeners to competitors like Spotify or Alphabet’s (NASDAQ: GOOG) YouTube.
Ad-free digital content is obviously a growing market online, but its potential is unclear. Nobody knows how many listeners will pay for music they can receive over the air at the present time.
The limited potential of digital advertising, notwithstanding, Sirius and Pandora have potential as a value investment. Managed correctly, Sirius and Pandora might form an audio content platform capable of competing with iTunes.
Should Pandora and Sirius buy iHeart Media?
An obvious means of expanding that platform is buying radio station operator iHeart Media. In particular, iHeart owns and operates 858 radio stations in the United States and claims to have 250 million listeners.
Uniquely, iHeart has major talent under contract including Rush Limbaugh. Despite his well-publicized problems, Limbaugh is still one of the most trusted media figures in America. For example, Gallup estimates that 52% of Limbaugh’s listeners trust him. Conversely, only 14% of PBS’s viewers trust that network.
Therefore, Sirius and Pandora’s best bet for survival and profitability is to invest in influential niche media like Rush and Howard Stern. Such figures will attract large loyal audiences that could generate large revenues from subscriptions.
Under these circumstances, investors and subscribers need to watch Sirius and Pandora closely. Their combined operation could make money from digital audio.