

Q: Does Pandora Media have a sustainable business model?

A: Pandora investors are being forced to think outside of the box.

The online-radio broadcaster lacks many of the fundamentals traditional investors look for, namely free cash flow and profit. Without key fundamental measures such as earnings to base the stock's valuation on, investors are left to guess and project when trying to decide if the stock is a buy.

There's a large degree of blind faith needed with Pandora. Of primary concern is the fact the company is burning cash. Pandora consumed $5.7 million in cash from operations after capital expenditures over the past 12 months. Because of the company's negative free cash flow, investors can't accurately measure the stock's value using a discounted cash flow analysis.

But with that said, Pandora seems to be fairly well-funded. The company has $89 million in cash and short-term investments as of January, giving it many years of a cushion even at its annual cash burn rate.


Meanwhile, the company appears to be turning things around a bit. Pandora reported a $14.6 million loss during the most recent quarter ended in January. But, more importantly to the company's sustainability, it turned free cash flow positive during the quarter to the tune of $6.8 million. The company is also increasing its revenue, including a 54% increase in the January quarter.

The company is clearly moving in the right direction and seems to have the resources to keep plugging away at its current trajectory. But there are still enormous questions, including the risk of competition from rivals ranging from Apple to Spotify. If new rivals threaten Pandora's already fragile business model, it would not be music to investors' ears. These dangers still make Pandora a big question mark for investors.

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