Seeking Alpha
Long/short equity, contrarian, special situations, wild cards
Profile| Send Message|
( followers)  

Summary

  • Pandora is still valued at $4.6 billion. That looks like this: $4,600,000,000.
  • Pandora has yet to turn any profit. That looks like this: $0,000,000,000.
  • Pandora belongs in single digits, offering 50% or more on a short at these levels.

"Give it up, Quoth", you'll say to me. "You've been calling Pandora a short all the way down from $40. It's been the right trade, now buck up and cover and move on to the next project."

Well, fictional person, you're right.

Pandora has been a tasty short for those that have been on board for the last three months. I've been calling Pandora (NYSE:P) a short all the way from $30 up to $40, and now all the way back down to $22 and change. The most recent two articles in my non-award winning series were titled, "Pandora Reminds Us Why Shorting it is a Great Idea", and of course my critically non-acclaimed, "I Will Short Pandora Furiously Until the Letter 'P' Falls Off of My Keyboard."

But, that doesn't mean the fun is over.

The best part about a short is no matter how low it goes, your upside can still be 100% when you short it. Fundamentals are in the shorts' favor with Pandora.

Further, in keeping with my convictions, when Quoth sits down to write and research the markets early in the morning, the first thing he does is throw on the iTunes radio "bossa nova" station, to give him a little early morning listening company.

I'm sleeping with the enemy.

I used to listen to Pandora a while ago. I noticed that I was listening to the same stuff, over and over. There was little to no variety if I didn't physically change the station I was listening to. It was a serving of 40 or so songs that eventually started repeating themselves. Further, if I changed from something like "Usher Radio" to "Sean Kingston Radio," the difference in the stuff played aside from the main artist was miniscule.

But this isn't a user review of why I don't use Pandora, it's an easy to follow explanation as to why I think you could still make 50% on a Pandora short. This company belongs in the single digits as I've contended for a while.

Over these last couple of months, what have we seen? The market is taking money out of momentum and high valuation stocks and moving it over into value stocks. Most momentum names were clipped during earnings season this quarter, despite posting good reports. Tesla (NASDAQ:TSLA) and Facebook (NASDAQ:FB), for instance - both making much more fundamental business progress than Pandora - both still clipped hard on decent earnings.

Pandora is a company that has never turned a profit. One of my main arguments about going short the company was that the competitive landscape was going to develop quicker than the necessary aggressive growth that Pandora was going to need to sport its valuation. Simply put, I continue to feel the same way.

P Chart

P data by YCharts

The market seems to think that Pandora is worth $4.6 billion. When written out in long form, that looks like this: $4,600,000,000. The company has turned a profit of $0.

That's a massive valuation for a company that has never turned a profit, has stagnant active listener statistics, and trades at a forward P/E of over 100.

The company's active user metrics fails to impress the market and continues to look like its plateauing. The company has hidden this by showing YOY comps instead of quarter-to-quarter comps. Soon, it's going to evident either way - perhaps that's why Pandora isn't disclosing these metrics any longer.

(click to enlarge)

What else has changed recently? Unless you've been living in the asteroid belt between Jupiter and Mars for the last week, you may have noticed the massive headlines about Apple (NASDAQ:AAPL) potentially buying Beats for $3.2 billion.

I contended in an article about this potential buyout that this was because Apple wanted to keep a stronghold on music, including streaming music:

Music and media are two of Apple's biggest assets.

Every quarter their iTunes revenue continues to grow, and buying music off of iTunes is synonymous with how many people purchase their music nowadays. Apple wants to remain the front runner and industry standard when it comes to people purchasing their tunes. Buying Beats does well to both expand into music accessories, but also to capture the company's subscription streaming service.

There's certainly a large chance that a lot of this acquisition has to do with Beats' subscription streaming service. Said to only have 200,000 subscribers, it can still be an asset for Apple, who is certainly going to look to protect iTunes. iTunes is under a small threat from companies like Spotify, who offer streaming subscription music. They could be trying to nip this threat in the bud here.

So, we can see that Apple doesn't seem to have any plans of backing off of its foray into the streaming music niche.

Until Pandora can show us that it can hang, this company remains in the "short at will" file. I'm floored by what the company is producing versus what the market is valuing them at.

As I said in a previous article, 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 (GOOG, GOOGL), and Spotify.

I continue to contend that a short from here, $22, could still yield over 50% gains.

It's likely that 5 years from now, Pandora will have been an afterthought to the streaming music field. The early adopter to get in, but the company that failed to grow aggressively enough and monetize to make it. Pandora will be to iTunes radio what Myspace was to Facebook (FB).

Best of luck to all investors.

Source: A Pandora Short Could Still Reap 50% Gains