Will This Law Make or Break Pandora?

Shares of online radio service Pandora Media (NYSE:P) came up over 7 percent on Monday, climbing as high as $8.40 per share after hitting a new 52-week low of $7.08 per share on November 16. Pandora has been struggling for months and losing money in part thanks to high artist royalty fees.

Trying to curb losses, the company and its allies such as CC Media Holdings will try to convince lawmakers to pass the Internet Radio Fairness Act, which could cut Pandora’s content costs by half. If the act becomes law, Pandora would be able to pay a percentage of revenue for music rights instead of a flat fee.

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CHEAT SHEET Analysis: Earnings are not Increasing Quarter over Quarter

Pandora Media has either lost or made no money for each of the past five quarters. In fact, the company has lost money in each of the last five years. Earnings per share came in at negative $0.03 for the most recent quarter, a gain from the previous quarter’s loss of $0.12 per share but obviously still unsustainable. Estimates for the current quarter average a gain of $0.01 per share.

Why would the Internet Radio Fairness Act Increase Pandora’s Earnings?

Cutting its content costs in half would pretty much instantly push Pandora into positive earnings territory. For the quarter ended July, Pandora spent 60 percent of its total revenue on content acquisition. For comparison, Sirius XM (NASDAQ:SIRI) paid just 8 percent of its revenue for royalties.

How Will This Affect Pandora’s Stock?

Pandora is clearly struggling. With advertising revenues failing to compensate for high costs, the company could be faced with continuing losses if the act fails to pass, and as a result see its share price remain low or drop further.

On the other hand, if the act passes and the company gets a free ticket into profit territory, it would be unsurprising if shares rallied. All eyes on November 28 when Pandora and allies are scheduled for a hearing before the U.S. House Judiciary Committee.

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