Pandora Media (NYSE:P) looks like a falling knife when reviewing its stock chart but that doesn’t mean all is lost. Let’s be clear that nobody who actually did his or her homework should be surprised by the volatility or its price decline. Further, the firm made it very clear in its filings that the firm is “currently” unprofitable.
Many now wonder why anyone would want to buy a company that has only financially succeeded in losing money. That’s why buying Pandora isn’t about the financials; it’s about the structural change it has caused in the society we live in today. This firm has successfully bridged the gap between the radio music word and the digitalized world. People are buying a bridge and hoping that management can install a better toll charging system that will make it profitable.
Let’s remember that music is one of the most primal and raw components since the beginning of human society. As well, if this company was a real stone in the water then the firm wouldn’t have been able to raise any capital over the last 10 years, but it did. Like most technology companies with great “potential” such as Pandora, it is often misunderstood and improperly evaluated.
When pondering whether Pandora is even worth the transaction fee alone we found that the firm actually has a couple great things going for it that could actually make it a great investment. Additionally, although the firm has shortcomings there are precedents for buying a company like this.
In truth, buying Pandora looks no different from buying some early stage biotech not even close to submitting a drug for FDA drug approval but promises to be developing the next miracle drug. Anyone who bought the biotech Dendron (NASDAQ:DNDN) in early 2007 or earlier at a decent price under $5 knows what we’re talking about. Moving ahead we feel that for a few key reasons Pandora Media is a BUY for a people who are looking to take on a high degree of risk and are looking to add a wildcard to their portfolio.
1. It’s User Base is Poppin with a Generational Disconnect
Yes we did use the word “poppin” but perhaps it should have been “crackin.” Who uses such odd lingo you ask? Well if you aren’t familiar with these terms, then it's younger generations than you. People whose world consists of Facebooking while at work or school, tweeting about a rough day, Tumblin (Tumblr.com) through the net, virally sharing content, and most importantly having their tunes played by Pandora. The firm has over 92M users and most likely the majority are 25 years old and younger.
It’s pretty safe to say the void between older generations and younger generations has never been wider when it comes to technology. Older generations have a very limited understanding of how much society for younger generations has structurally changed due to new technology such as Pandora. If Pandora were a horrible business idea with no hope of success it wouldn’t have been able to garner over 92M users with almost no advertising. As time passes, the firm will only rack up more users as this new technology becomes more mainstream and starts to penetrate older generations.
Given the number of users of Pandora and the high level of user interaction, it’s clear that Internet radio is in high demand by the world at large. The problem here is that this thought and proven fact is extremely difficult to quantify by monetary terms. That’s why we call this company a wild card because the ability to monetize this momentum is solely dependent on management’s ability to get creative in terms of developing new revenue streams and improving existing ones.
2. Precedents to Buy Pandora
Let’s face it, nobody will ever completely forget about the dot com bubble or get the bad taste out of their mouth. Still, look at a names such as Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) and Ebay (NASDAQ:EBAY) and it’s not hard to remember that these firms were viewed with the exact same suspicion as Pandora is today.
Few truly understand the potential of technology companies like these when they first hear of them. In particular, Amazon probably got the most heat given how long it remained unprofitable after going public. Amazon always had great traction and great momentum but it just didn’t have the right business model in place initially that could make it a profitable entity, but today it does. We hope that this will be a repeat story when the name is changed from Amazon to Pandora on some level.
Pandora is essentially in unprecedented water in terms of technology and business innovation. Trying to fairly compare 1990s tech companies to Pandora is like comparing an original Ford (NYSE:F) Model T to a brand new Ferrari. Yes they are both automobiles but they are beyond worlds apart in a million different ways. The reason to buy Pandora now is because investors want to get in at hopefully a lower price before the firm truly illustrates sustainability and profitability. After all, in order to gain one must risk something and Pandora is no different in this respect.
3. Could be Living on a Prayer
Anyone who saw the founder and CEO of Pandora respond to questions while being interviewed by CNBC correspondents on the first day of trading probably felt their heart stop for a moment. Anyone about to buy shares like we were took their finger off the buy button quickly and waited for it to drop substantially. The CEO got tongue tied, didn’t answer any of the questions very well (just kept repeated the term “user experience” a lot), and created a lot of doubt with investors. Still, we aren’t living on prayer. Let’s face it, getting multiple rounds of funding from angel investors and venture capitalists is a lot harder than going public.
The firm is being run by extremely intelligent people who have not only conveyed a business model that top investors around the world believe in but also have the ability to alter the business model. In reality, as the firm moves forward we see the firm substantially improving and or changing the business model to attain substantial profitability.
Management has the intellectual capital and sufficient investor pressure to make profitability priority number one. For right now, it looks like management’s style is to under promise and over perform even though it looks like a PR nightmare.
Should Have Waited to IPO
Pandora went public far too soon in our opinion regardless of how old the company is. Instead, it should have taken an approach similar to what we will likely see with Facebook, where the firm will actually have a sustainable profitability model in place before going public. The firm likely went public because initial investors wanted to free up capital that had been locked up for years given improving IPO demand. It is what it is though and there is no turning back, so best to just get over it.
Pandora is a calculated roll of the dice for any investor. Where a success failure probability model really should be created to understand the total risk entailed because investing in this company today is essentially like investing in a startup. In addition, when it comes to the internet space of technology it is still really the Wild West because things are so unpredictable. At this point there aren’t too many other tech wild cards with Pandora’s potential and that is why we list it a BUY along with all the other reasons above.
Disclosure: I am long P.