In the past week, we've seen LinkedIn (NYSE:LNKD), Zynga (NASDAQ:ZNGA), and Groupon (NASDAQ:GRPN) report their earnings. LinkedIn strongly beat earnings, Zynga missed, but after a very strong bull run, and Groupon also took a bad miss as the company failed to report its first profitable quarter. In this article, I will analyze Pandora's (NYSE:P) possible performance as it goes into earnings.
Currently, Pandora looks very overpriced. The company has had $240.66 million in revenue in the last four quarters while Pandora's market cap is currently $2.12 billion at the close of trading on February 15th. With its first positive earnings per share last quarter (at less that 1 cent per share) the company still has not proven that it can be profitable. In addition, Pandora is expected to lose 2 cents per share in the quarter ended January 2012 and expected to just about break even in this upcoming next fiscal year.
The performance of tech darlings has shown us that major adjustments occur around earnings reports. Pandora's stock hovered around $10 throughout December and has since shot back up to the $13-$14 range. This bull run looks similar to Groupon's and Zynga's bull runs right before their big drops. I believe right now, based on performance analysis, that Pandora will stay around its current price until its next earnings report, where it will then take an adjustment to the $11-$12 range similar to Groupon and Zynga.
I still believe that Pandora's competitive advantage is virtually non-existant and the company will struggle with profitability for years to come. Unlike LinkedIn, Pandora's subscribers are not very bound to the website. There is no close professional competitor to LinkedIn and if social network subscribers move to a new site, they have to do a lot of work to rebuild their profiles, which can be a hassle (despite still being a possibility).
For Pandora to increase profitability it either has to sell more premium subscriptions or sell more advertising. The premium subscription welcomes a lot of competition since there are a lot of cheap or free alternatives to Pandora and if the company adds more commercials, Pandora users can simply move to a new internet radio that can get plenty of funding and operate on negative earnings. Short term and long term, expect Pandora stock to take a huge downward adjustment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.