|From: Glenn Petersen||9/2/2011 1:49:55 PM|
|Pandora Should Be At $4 |
September 2, 2011
Pandora Media, Inc. ( P) operates as an Internet radio company in the United States. It provides its radio service to traditional computers, Android phones, Blackberry phones, and the iPhone. The company allows listeners to seed personalized stations with artists, composers, songs, and genres or choose stations organized by genre, as well as enables listeners to create up to 100 personalized stations and use combination feature to listen to two or more of their stations at one time.
Pandora has a very simple business model. It allows people to listen to music for free. The company generates revenue from ads on the stations and uses the proceeds to pay royalties and help keep their radio stations up. Sounds like a great business model except for the fact that the company has had a daunting task of turning a profit.
Currently the stock trades around $12 per share. This is a very high valuation for a company that can't hold a profit. So why such a high valuation? Well the market believes that there is significant growth opportunity ahead and a consensus of analysts are expecting 45% growth.
Simply put even if Pandora's consumers grow 45% annually, the company will still lose money. This is because the way the company is set up. Expenses are always higher than revenue.
Pandora reported earnings last week. The company reported a 117% increase in revenue growth. Sounds like the company is doing solid except for the part where its cost rose 130%. The content acquisition costs rose the most as the company is trying to stay competitive against companies such as Sirius XM ( SIRI) and Spotify.
The other concern that I have is the employee stock option plan. The plan is extremely dilutive and considering this company basically has no net income, the company is hurting itself.
My $4 price target is actually still a bullish prediction and let me explain why. Let's say that the company starts generating positive net income around 15 cents a share annually, which would be a significant improvement and a difficult task to achieve to achieve for them. Even at $4 a share and with an annual net of $24.15 million(15 cents per share). The P/E ratio would be around 26.6. Keep in mind the company lost $1.8 million just in the last quarter alone.
At the current valuation of $2 billion with a P/E ratio of 25(higher than the average S&P 500 average) the company would need to make $80 million a year. The fact that the market keeps giving it such a valuation is such a surprise. A large amount of speculation and a lack of knowledge has caused the stock price to maintain this valuation. Long-term this stock has nowhere to go, but down.
If you want exposure to the music industry there are much better companies out there that are turning a profit. Here is a few:
Sirius XM is on the verge of a turnaround and is already generating nice profit. The company has strategic partnerships with auto manufacturers such as Ford ( F). Ford has been offering several Sirius promotions and has included the radio system in most of their lines. While Ford is also enjoying strong sales, Sirius will gain from that as well. Sirius trades at a forward P/E of 22.
Cumulus Media ( CMLS) is another stock in the radio space. The company operates almost 350 radio stations in mid to large size markets. The company has been generating millions in free cash flow.
Of course if you are really willing to take some risk, then you could go short Pandora. I am very confident long-term the stock price will have to fall to match the fundamentals. If you are going short, just be careful as the sheer amount of speculation can still drive this up. The market can remain irrational for a very long time.
The sad thing is that CEO even knows the company will probably not be profitable. I encourage you to watch his interview here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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|From: kaching!||3/6/2012 6:26:25 PM|
|Today's results confirm what many have suspected: |
This is a stock with growth in poor revenue generating areas, problematic expansion potential, combined with an inability to control costs.
With regard to mobility, Pandora touts lots of metrics about increasing mobile growth, but only earns one-third as much off mobile as it does off of desktop (although it likes to frame this as an "opportunity"). Meanwhile costs per song played are the same regardless of whether it is mobile or desktop. For those in the USA, you may not be aware that Pandora is not available everywhere else e.g. Canada due to an inability to come to licensing terms for songs. According to it's own documents, in the U.S. Pandora has projected increasing costs on a yearly basis as the amount it will have to pay for each song played will increase by a penny per year e.g. 11 cents to 12 cents, then 13 cents, 14 cents, and 15 cents. These would be substantial cost increases for any company with substantial revenue growth , but are basically unsustainable for this company.
Looking at insider activity, it not that hard to discern what insiders think of the company prospects (sell). One can argue that some are just taking advantage of awarded options, however, the anemic number of insider buys speaks volumes.
The 50% miss in earnings (-3 cents vs. -2 cents) is based on revised downward projections from last year. This does not bode well, and I think investors would be well advised to be wary of all the bullish analyst projections.
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|From: kaching!||3/19/2012 6:03:54 PM|
|Questionable Rumour on P may have bumped price|
Hard to tell if this rumour (below) on MSFT taking a strategic stake in Pandora has any cred but I seriously doubt Ballmer would be dumb enough to pay anywhere near the current price let alone taking a stake valuing P at $20/share. Looks more likely daytrader wishful thinking...
Very few barriers to entry in this business.
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|To: FactsOnly who wrote (24)||4/20/2012 3:09:28 PM|
|I would never use Pandora and here's why: There is a vast universe of incredibly interesting music out there. |
Pandora focuses your listening into a tiny niche. If you like a great band it will find the lesser bands that copy the first band's sound. That is anti-creative and stifles innovative music and probably the reason most people over 25 stop listening to music "Because they don't make good music like they did in my day."
I've been hearing that last one for 50 years. Sheech.
I want to expand my listening into areas I where would not necessarily be comfortable. I want to expand my mind and stretch my ears into new area. Most of the great music composers were misunderstood at first. Beethoven's students complained they couldn't understand his music. There were riots at the first Stravinsky ballets. Miles Davis was constantly criticized when he innovated. Bob Dylan was criticized when he went electric.
The way I find great new music is almost always through friends with big stretched out ears. My friends have recommended a lot of music that I initially did not like, but because I had respect for their intelligence I stuck with most of it until I understood what they loved about it.
The loser here in actuality is... Apple. The people who really know about what is new and great are... surprise... musicians! Musicians sell music on iTunes and Apple wants to expand its social values but they are overlooking this treasure, the musicians themselves and who they listen too.
On the other hand I think Pandora will survive because 90% of the listening population uses music for the "background" of their lives. Quality and innovation are not a big deal to them. Cheap is a big deal. You won't find many of these folks shelling out $100 for a Duke Ellington box set. They like 4/4 time and major/minor chords. A "good beat" and "a good melody" known as a hook in the trade. So its pretty easy for hollywood to pump out more of the same. A good beat and a good melody are not rare commodities, we are drowning in it. So as any commodity the law of supply and demand rules, extreme thin margin and huge cash flow.
Only 10% of the population takes time to actually sit down and do nothing while listening to a piece of music.
This would be akin to going to a gallery and glancing at Michal's photos while carrying a laptop working and checking stocks. You cannot empathize with the creator of the art form without some concentrated thought. You cannot guess the creators intentions if you don't at least try.
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