For the majority of 2013, I've been writing about why I'm short Pandora (NYSE:P). People have publicly called me out on why my Pandora thesis doesn't hold any water, but I continue to remain short the company. You don't need an MBA to understand the argument that I made while presenting my case:
1. The company's valuation is ridiculous with a market cap of $6 billion and a P/E in the hundreds.
Pandora has fared extremely well over the last twelve months, with the market placing a massive value on the streaming music provider. After hitting lows of barely under $10 in 2013, the company has nearly quadrupled. In the last six months, the company has rewarded investors handsomely as well, to the tune of almost 70%.
Pandora had been a winner for investors. After earnings today, the market seems to be getting a little cautious about the stock.
After hours today, 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. It is the best quarter in terms of profitability that the company has ever had. Today's earnings offered insight to its stub of a year, which encompassed November and December, while the company changed its FY.
But the stock traded off after hours, down nearly 10% to $32/share, on guidance that did nothing to reassure analysts. With a valuation as massive as Pandora's, the forward looking guidance is arguably the most important part of an earnings release. Twitter (NYSE:TWTR) is currently providing us with another example in real time of why forward-looking guidance is extremely important to companies that are valued at extremely high multiples.
Additionally, with the skeptical market we've had so far this earnings season, if you're not delivering EPS, revenue, and guidance all above expectations a la Michael Kors (NYSE:KORS), you're not going to get any love from this market.
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. Hardly the type of forward-looking outlook that a company trading 110 times its forward earnings should be reporting.
Again, with the major markets skittish on currency issues and emerging market problems, social media stocks with massive valuations are arguably the first trigger that people pull when it comes time to get out of already profitable investments to liquidate.
I was having an issue accessing Pandora's webcast this afternoon, but according to Business Insider:
On its earnings call, Pandora CEO Brian McAndrews says it's much more relevant for investors to look at its Q4 and full year revenues, as opposed to the guidance for this year.
Well, Pandora CEO Brian McAndrews, I can't say I agree with you one iota. When you're heading up a company with a $6 billion market cap that's trading at a massive multiple, while competing with major industry conglomerates like Apple - the guidance is relevant to look at. Need confirmation of that? Pandora is trading down nearly 10% after hours.
I continue to remain extremely cautious on Pandora's long-term prospects. If the company survives and flourishes, it's still likely that its valuation gets roped in as investors choose to take a bit of a reality check on their Pandora investments.
Disclosure: I am short P. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.