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Stay Away from Pandora

May 14, 2014 | About:

I spent the better part of 2013 and some of 2014 trying to tell people that Pandora (NYSE:P)'s long-term prospects, unless acquired by someone like a Microsoft, remain very risky. My thesis was that competition from Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and Spotify was going to make it tough for the streaming music player to have long-term continued success.

Here’s why I think Pandora is a risky investment:

  • Pandora will be facing increased pressure from iTunes Radio moving into 2014.
  • Pandora's audience metrics to end the year — the catalyst for the stock for most of the end of 2013 — were an illusion of sorts.
  • Pandora is losing the race to both iTunes Radio and Spotify for international markets.
  • Pandora is severely overvalued with a $5 billion market cap and a P/E of over 100 — making it one of the first stocks to be susceptible to macro market corrections of any sort.

Well, interestingly enough, Pandora reported its monthly audience metrics, and not only were the numbers not so impressive, Pandora decided that in a couple of months, it doesn't even want to report these metrics anymore. That is not something you do if you think growth is going to continue — trust me. Here’s how Pandora’s monthly metric panned out.

  • Pandora had 75.3 active listeners last month, +3% month over month and +11% year over year. (PR)
  • Listener hours for the month rose 9% Y/Y to 1.51 billion. That's a slower growth rate than the 13% posted for .
  • Pandora's share of total U.S. radio listening was 8.91%, up from 8.57% in January (thanks in part to seasonality) and 8.25% a year ago.

The company says it will discontinue sharing its audience metrics after providing May numbers.

I wonder if I'm still "devoid of context?"

Imagine that — all of the analyst upgrades into the $40s, all of the bullish sentiment after earnings, all of the rumors of Microsoft (NASDAQ:MSFT) looking into buying the company, and all of a sudden, the numbers just simply don't show up. Now, who is going to fork over $5 billion for a buyout without seeing how the metrics for the next couple of months line up? I certainly wouldn't.

Again, Pandora is a company priced solely for massive growth, and the company makes its money mostly from advertising. If the amount of advertising channels doesn't increase greatly, there's no justifying giving the stock the credit that the market has, pricing it at this insane multiple.

Earlier this month, Pandora reported EPS of $0.11 ex-items versus expectations of $0.08. The company also reported revenues of $200.8 million versus expectations of $201 million.

Pandora's guidance for the first quarter was for a loss between $0.14 and $0.16 per share, with revenues of $170 million to $176 million. Revenue for the year is supposed to be between $870 and $890 million with EPS ex-items of $0.13 to $0.17 a share.

It wasn't the guidance the street was looking for on this stock that trades at over 100 times forward earnings. But, after the stock took a short dip back down to $32, it was promptly run back up into the $40s, a level that this stock is going to have some trouble getting past in the future, it's likely.

And so, this morning, it seems like the market is starting to realize that the company is a massively overinflated, monster P/E stock, and needs to get roped in a bit. As of 9:02 CST, the stock was off almost 6.7%.

Pandora's sole long-term prospect is for it to pull a Green Mountain (GMCR) style hail Mary, where it partners with a company like Microsoft, or is acquired before the bubble continues to burst.

Pandora remains an avoid or a short at all costs; there's a lot further down for this stock to go. Mid-$20's by the end of 2014 wouldn't surprise me, and the stock will STILL be massively overvalued.

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