I've written a couple of articles of late, disclosing and backing my recent short position that I took in Pandora (NYSE:P) through purchasing some puts. I've touched on small bits and pieces about why I'm short Pandora - namely all having to do with Apple's (NASDAQ:AAPL) entry into the streaming radio sector. Although that's a huge reason that I'm short, it's not the only reason.
Just yesterday, I wrote an article offering 5 reasons that I'm still short Pandora. I argued that Pandora's September audience metrics were meaningless, the company is failing to evolve, and that its likely going to fall at the feet of Apple. The purpose of this article is to amend that and tack on number 6; a big number six, too. Also - a number seven.
#6 - Apple Just Beat Pandora in the International Game
In keeping with my mindset of "there's no way in hell Pandora can compete with Apple", Bloomberg reported this morning that Apple is set to expand iTunes Radio to countries outside the U.S. by the beginning of 2014 - beating Pandora to the punch:
Apple Inc. plans to expand iTunes Radio to English-speaking countries outside the U.S. by early 2014, beating industry leader Pandora Media Inc. to the U.K. and Canada, people with knowledge of the situation said.
ITunes Radio is also set to start early next year in Australia and New Zealand, where Pandora already operates, said the people, who asked not to be identified because the plans aren't public. Nordic countries are also being targeted in the same time frame, the people said.
Apple is moving faster than Pandora because it forged agreements for international rights with Vivendi SA's Universal Music Group and other record companies, said one of the people. Pandora, which doesn't have such deals, relies on rights granted by government entities, limiting service to the U.S., Australia and New Zealand.
Trudy Muller, a spokeswoman for Apple, declined to comment yesterday.
Pandora, Apple and rival offerings from Spotify Ltd. and Rdio Inc. let customers listen to a mix of songs based on their musical tastes.
Apple last month instantly became the biggest challenger to Pandora when it released iTunes Radio with the new iOS 7 mobile software that comes with every new iPhone and iPad. More than 11 million listeners sampled the service in the five days after it became available.
With the expansion, Apple is mimicking its rollout of the iTunes music store more than a decade ago, starting out in the U.S. and then moving to other countries, said one person.
So, tack that onto the list of reasons why iTunes Radio is going to knock Pandora out of commission. That list now stands at the following:
- iTunes Radio has more content.
- iTunes Radio is better sound quality.
- iTunes Radio is cheaper for the paid version.
- Up to 50% of Pandora's listeners are Mac users, most of whom are likely already using iTunes in addition to Pandora.
- Apple has limitless cash, is profitable, and has the resources to launch iTunes Radio any way they want.
- They're beating Pandora to the international expansion punch.
Not looking too good for Pandora, at this point. As several contributors pointed out, Pandora's valuation was based on the fact that it's going to need to grow and expand a ton over the coming years. Otherwise, there's no reason for it to support the $5 billion valuation it carries. Apple just took the wind out of the sails of international expansion, beating Pandora to the punch in what looks like a ton of countries.
Mr. Market is starting to understand that Pandora might be in trouble. As this news was announced, Pandora quickly shed 5% in intraday trading on Tuesday. The end is near.
#7 - Pandora is About to Dilute by 7%
Pandora has a share offering that's reported to be closing on Tuesday of this week. It's an offering that is going to raise an estimated $325MM for the company.
Not only that, but this offering is being done at $25/share, which may have been a discount to market from the time it was conceived - but those participating are now already underwater to the tune of about 2.5%.
Seeking Alpha reported on this last Thursday:
Pandora upsizes offering to 18.2M shares, prices it at $25
In a move reminiscent of LinkedIn's recent offering (and driving home investor demand for high-growth Internet names), Pandora ( +0.5%) has upsized its stock offering to 18.2M shares from a prior 14M, while pricing it at $25. (PR)
Whereas the company and VC firm Crosslink Capital were originally planning to sell 10M and 4M shares, respectively, they're now selling 13M and 5.2M. Underwriters have a 2.7M-share overallotment option, and the offering is expected to close on Tuesday.
Pandora stands to reap gross proceeds of $325M. Its diluted share count is set to rise by over 7%.
In addition, the participants of this financing could have likely shifted how they feel about the company in the time between the financing filing and now; which is time inclusive of Apple announcing preliminary iTunes Radio stats, as well as its intention to take its show overseas.
Regardless, the 7% dilution, still not priced into the 7% Pandora is already off on Tuesday, isn't going to be good for shareholders.
Again, as I stated yesterday, I remain short on Pandora. As with any short position, you can not only benefits from a company floundering fundamentally - but from macro market pullbacks as well. With the government operating with the efficiency of a coach selecting Newt Gingrich as a first round draft pick in next year's NFL draft, and the markets looking uncertain, a short position in Pandora has two ways to win: Pandora's inevitable crushing by Apple and the broader market pullback.
As always, best of luck to all investors.