Pandora Media (P) is a leading, domestic Internet radio company that generates revenues through advertising and subscriptions. It has highly valued stock. As such, there are some things that may be expected of it, including a lack of debt and projections of rapid growth. Another pertinent topic is its share count, as a small float can support a lofty price.
Regarding the company's September 16, announcement that it is offering 14 million shares, issuing 10 million and selling four million on behalf of venture capital firm Crosslink Capital, you can listen to none other than billionaire short seller Jim Chanos speak about the issue. Just after 13 minutes into this video clip, he says that Pandora is amongst corporations that have a
Very, very limited float…meaning there are not enough shares outstanding…which inexorably will get onto the market through venture capital distributions and Form 144 insider sales…
About similar stocks, he says "the amount of shares, we think is going to change dramatically into the Fourth Quarter of 2013 and into 2014 if the prices stay where they are..."
There has since been another announcement, on September 19, of a 4.2 million share increase from Pandora. However, the company should gross $325 million from this offering - and the stock price has moved higher. According to a Form 424B4 filed today, "The underwriters expect to deliver the shares to purchasers on September 24, 2013." Downward pressure may be applied on Tuesday.
Let's turn to Pandora's extensive analyst coverage. Yahoo! Finance shows that 19 brokerage firms rate the stock and consensus among them is 2.4, up from last week's 2.5 which was the equivalent of a Hold. The median target is $24, while shares currently trade at their 52-week high: close to $27. P is richly valued according to their estimates of $0.28 in 2014E earnings; and a blistering 40% growth rate. Investors are paying now for future performance. A close look at some of the larger banks' work gives reason for pause beneath their overall enthusiasm, however.
Goldman Sachs recommends P, having assigned it a Buy rating on August 23, with a 12-month price target of $29. The firm's month-old research estimates 176,089 million weighted average shares outstanding in 2014, and 178,513 in 2015. Pandora's Form 10-Q shows 175,343 as of July 31. Looking beyond this substantial dilution above estimates, here is the accompanying valuation:
Our 12-month price target goes to $29 from $27 and is based on EV/sales of 5X CY2014E vs. peers at 4X justified by c. 2x faster growth.
Remarkably, any investor who bought shares after reviewing the report at the time of its issuance would be enjoying 23% gains in under one month.
Perhaps the most important operational consideration for Pandora Media is new leadership. The company has just selected a new CEO, Brian McAndrews, who is replacing Joe Kennedy after his nine years of service. JPMorgan, rating the stock Overweight as of September 12 - despite a $25 price target - is enthusiastic about the company's new leader:
We think McAndrews is a strong hire for Pandora given his deep experience in the digital media and advertising space across both smaller, high growth companies and well-established publishers…We believe McAndrews is well-positioned to lead the company's next phase as it focuses on product enhancements, increased monetization, upcoming royalty rate negotiations, international expansion, and deeper integration into automobiles…We look for increased emphasis on building a self-serve platform to bring more advertisers to Pandora, more advanced targeting capabilities, and expanding measurement of Pandora beyond [third party] Triton Media.
He is the new leader of one of the companies that is poised to benefit from increasing prevalence of mobile devices (another is Xoom). Though there is much to like about him, time is needed to measure his performance.
Presently, important metrics for Pandora are encouraging. One is active users, as shown in the following July 31 table,
Another is advertising revenue per thousand listeners (RPMs), and it also underscores development; notably in mobile, though figures are interspersed with those for automobile-based customers, which could involve regulatory risk.
Here is Goldman's summary:
Pandora reported 2Q results ahead of expectations, with revenue of $157.4mn versus consensus at $156.3mn, and non-GAAP EPS of $0.04 vs. consensus at $0.02. Outperformance was driven by higher mobile ad RPMs and subscriber revenue growth. Guidance was above consensus expectations. The company made several product, investment, and reporting announcements…We continue to believe there is considerable upside to consensus estimates as local advertisers move online, Pandora's investment in sales and technology show leverage, and ad buying platform integration drives long term growth. With P trading at a discount to the group relative to its growth rate, we believe the risk/reward in owning P is favorable.
Competition is formidable, and a chief member of the "Group" is Sirius XM Radio Inc. (SIRI). Apple's (APPL) ecosystem, including its newly launched iPhones, soon to be launched iPad products, and iTunes service may take market share in the future. Spotify Ltd. is another worry.
Pandora has recently had a court win, which may be attributed to the surge in stock price. Per the judgment, licensing rights to content should be maintained through 2015.
Pandora is doing well in multiple regards. Its growth is remarkable and expected to continue. It has just added cash to its coffers. Investors may own a business that continues to be profitable in the future, and one that continues to appreciate - perhaps even during times of dilution. Obviously, the advent of a new CEO, no matter how heralded, presents risk. Further, many shares should be delivered on Tuesday; that could result in a hiccup.