Without question Pandora (P) is all but a biotech company in name. Why? We noticed more than a few similarities that are pretty hard to deny. What are they, you ask? Pandora - like a biotech - has dumped millions of dollars into R&D, had successful test trials but no real money to show for it yet, and most importantly it will will either be a huge success or a huge failure.
Pandora as a firm needs to leverage its wildly popular platform into something that will lead toward profitability like a biotech ultimately depends on FDA approval. In our view there will be no middle ground for Pandora, just like a biotech where it becomes immensely profitable or gets toasted and thrown in the trash can. We don’t see this as a bad thing though because just like a speculative unproven biotech company if Pandora succeeds the potential for gains could be astronomical and that is why we think it’s a "buy" given that we are aware of the risk involved.
Why Many Are Clueless, Especially the Analysts
There are a variety of reasons why most analysts are downgrading Pandora, and they are as hilarious as they are varied. We’ve heard that Pandora is the arch rival to Sirius XM (SIRI) and that Sirius XM will ultimately win. Really? Last time we checked Sirius XM was “satellite radio” and Pandora was “Internet radio.” That’s like comparing a Honda to a Lexus. Yes both are cars but they go for different segments of the market and sell on different points. As well, Pandora is the one literally penetrating Sirius’ home turf in the car market and not the other way around. This makes us question why Sirius XM was the default winner when it is being put on defense.
Another personal favorite is hearing analysts explain how Pandora can never become profitable or how it’s almost impossible. They create “credible” growth forecasts and build out financial models that support this argument. Well it might take these analysts another decade to realize it but using financial modeling such as a DCF only does so much for an atypical speculative firm with the assumption that the assumptions on Pandora are correct. In particular, a few of these reports were worth less than the paper they were written on by the time we finished reviewing them, so take what you hear (including us) with a grain of salt.
Untold Potential Combined With Significant Risk
In our view investors aren’t buying Pandora for the revenue it generates today. Instead, they’re putting money on the line for some potential level of strong profitability that they hope the firm can capture in the future. Sound familiar at all? To us it sounds identical to Dendron (DNDN), which is now one of the top biotech picks of the last decade, if you got in early. At the same time we can’t forget that it almost took the firm a decade to achieve this status.
Amazon.com (AMZN) is another example of a firm that wasn’t properly understood in the past. After the dotcom crash the firm on some level became a stock market pariah because even though it continued to “grow” it also failed to realize a profit for a good period of time. We know today that the story has ended happily but we also know it involved a substantial amount of risk and reward. At this period of time we don’t know of any financial model that had the capability to fully capture or extrapolate the firm’s unrealized potential. Point here is that analysts are taking the wrong approach in attempting to evaluate this firm.
Call to Action
We rate Pandora a "buy" given its hugely successful music platform and our belief that there is a sufficient probability that the firm will “create” a future revenue stream that leads the firm to overall profitability. Just like a biotech, there isn’t a “guarantee” of future profitability and the stakes are as high as they can get. As well, this company has enough volatility to make anyone’s head explode. Our view is that anyone willing to put money in this name should be comfortable with flushing the equivalent amount down the toilet. Why? If this firm doesn’t become “profitable” in time it will crash and burn. After all anyone investing in Pandora should be investing in its future untold potential, not today’s losses.
Disclosure: I am long P.