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Pandora: The Best Short Opportunity

May 28, 2014 | About:

Pandora (NYSE:P) is going to be a perma-short for me. I plan on loading some puts when the week opens again. My price target for the company remains in the single digits, where I will then reevaluate the path the company is on. Pandora is all bark, no bite.

Pandora remains my most confident short for the long-term. Pandora has pulled back significantly off highs and still has more downside. I've often argued that Pandora is a great short prospect. It's going up against Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG)(NASDAQ:GOOGL), is massively overvalued (still at $26), lags in both content and innovation, and has a stale user base that is failing to grow as aggressively as it needs to.

This also marks yet another quarter where the company has guided lower than what the market expected. Pandora is getting good at disappointing the market's future expectations.

What we need to get into focus to begin with is the way that Pandora is currently being valued by the market. This is a company that the market has put a value of nearly $5 billion on. The company guided for $0.14 to $0.18 a share for the coming full year. That means Pandora's forward P/E ratio is somewhere in the realm of 140.

Did I mention this company is indirectly competing with the most fundamentally sound company in the world, Apple — who just happens to have a stranglehold over all things streaming music? Apple, in specific, has the goods to really give Pandora the business. Apple has more content, for less, in more countries. And, they just reaffirmed their dominance with the iTunes store growth of 11% just days ago.

Pandora expects second quarter revenue of $213M-$218M and EPS of $0.00 to $0.03, below a consensus of $219.3 million and $0.05. Full-year guidance is for revenue of $880 million to $900 million (up $10 million from prior guidance) and EPS of $0.14 to $0.18 (up $0.01) vs. a consensus of $892.3 million and $0.16. Shares -5% AH (first quarter results, PR).

The main reason that Pandora was clipped in after-hours trading was because the company's outlook for the current quarter was below estimates, and the increased yearly outlook that the company offered also fell flat. In the second quarter, the company guided for revenues of $213 million to $218 million, and EPS up to 3 cents per share. The consensus estimates were for $218 million in revenue and EPS of $0.05.

The company's active users continues to plateau, as I first mentioned in an article months ago. Among a sea of improving metrics — that one could argue aren't growing fast enough themselves — active users continues to slow, possibly even regress. When charted out monthly, it's even a bit easier to see.

These numbers haven't exactly been scorching to the upside since November of last year. In its press release, Pandora states: Active listeners were 75.3 million at the end of March 2014, an increase of 8% from 69.5 million from the same period last year.

That looks good and well, but when you look at recent numbers or start to compare month-to-month, the numbers look a bit uglier.

I've said it before and I'll say it 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. If these active listeners can't continue to grow aggressively, Pandora is going to have a major issue showing the market that it's worth the multiple it trades at.

Speaking of multiples, I think Pandora is susceptible not only to macro market pullbacks, but this recent trend we've seen of money pouring out of momentum stocks and moving into value style stocks.

Pandora's earnings failed to do anything to change my view on the company. I'm still underwhelmed by what the company is producing versus what the market is valuing them at. Pandora remains a "short at will" for me, until further notice. It's time to look through the hype with this company and slap it with the valuation it deserves — single digits until it can prove that it can keep growth versus Apple, Google and Spotify.

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GuruFocus has detected 3 Warning Signs with Pandora Media Inc $P.
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