Pandora Media (P) reported earnings after the close on Tuesday and even from Wisconsin I believe I can hear the die-hard longs of Sirius Radio (SIRI) cheering and giving each other high fives. It's completely understandable as Sirius shareholders have heard from me and others ad nauseum about what a poor opinion many have on Sirius. I will cover why the earnings report is a negative for Sirius shareholders in a moment, but for now we will take a look at Pandora and how to make a buck in what is sure to be a fast market with opportunity for those that have a plan and prepared.
First, let's take a look at the numbers one by one.
Analyst estimates were about a loss of -$0.02 per share, but it's obvious that investors expected a beat. I didn't have any conviction and didn't trade Pandora, but I was expecting a beat along with everyone else. When Pandora reported earnings of -$0.03 I believe a lot of people went back to the spreadsheet to try to figure out what just happened. Some of course went back to the trading screen to exit or maybe to look for short availability. This number is not the real sin or the driver that would send the shares down almost 25%.
The next number is revenue. Revenue reported was $81.3 million compared to estimates near $83 million. While the estimate was just short of $83 million technically, it doesn't matter. Pandora should have beaten this number even if earnings didn't beat. This is a key metric because it helps investors understand how well Pandora is able to monetize with ads. Of course subscriptions are available, but for this investor the number that matters is revenue. This along with earnings is disappointing. Considering how few ads Pandora have (I know as I listen to Pandora online at least once a week) one would have to believe that Pandora could have sold a few more ads and pumped up the numbers a bit further. The fact that they couldn't meet expectations demonstrates to me that maybe the reason they have so few ads is not about building the brand, but perhaps an inability to sell ads. It also appears that I may have a lot of others who agree with this theory based on the stock price reaction. As bad as the top line miss was, I do not believe the revenue miss was enough to drop the stock as much as it fell.
Ok, so if the earnings don't matter (much) and the revenue doesn't matter (more, but not the keystone) what does matter? The last key metric and the number I believe totally drove the stock price is future guidance. Wall Street hates guidance misses more than just about anything. Minor sins like earnings and even revenue can be forgiven if a company can at least paint a brighter tomorrow. Missing on guidance is a cardinal sin and Pandora is likely looking at a single digit price in stock before making a new high above $26 as seen in the first day of trading with the IPO.
We still don't have a 200 day moving average, but we can take a look at the 90 and 60 day moving averages. Technically a drop under the moving averages along with the faster moving average (60 day in this case) below the slower moving average (90 day) is negative for most chart and trend followers.
With that said, and absent the technical point of view, it is my experience that such a strong downward move like witnessed in after hours "breaks" the back in the stock and it takes at least two good quarters to build back investor confidence. While waiting for the "two good quarters" there is opportunity to make gains for some, and perhaps get out with the least amount of blood letting as possible.
My experience with guidance misses is the stock price is likely to have some follow through the next day and about half the time even on the second day after. Even so, options may be able to provide an excellent tool to make a gain with Pandora regardless of the price action in the next few days. When Pandora opens up for trading on Wednesday the implied volatility will likely blast through the roof (not a big surprise) and provide an opportunity to either put on a buy-write (buy the stock and sell a call option) or short a put option (can be cash secured).
The front month (March 16th expiration) $10 puts are likely to trade near $1 and almost for sure the $11 call will trade for about a dollar as well. We know two events appear to happen over and over in this situation. First is the option premium from implied volatility should fall within the next couple of days with some lift off the bottom by Monday and the price should stabilize as the market calms. Given this situation, even if the stock price is the same on Monday, the options sold on Wednesday this week are likely to fall 30% or more.
Looking at the options for both calls and puts I like the calls a lot more. Greater liquidity and premiums are generally higher in the relative strike/stock price equation due to the relative low price of the stock. If you trade with a broker that has very low transaction costs for stocks and options a call-write will likely make more sense and if you have relative high transaction costs you may want to make sure you are getting some type of real value for the extra money and focus in on shorting puts if you want to gain exposure to option premium and or risk with Pandora.
If you're just trying to keep your head above water I feel your pain. We have all been there and the good news is that within a week or two the stock should bounce and retrace quite a bit of the drop. Be careful with trying to play the "I just want to get out at even" game. This is a losers game played by newbies that professionals understand is not a way to make money in the markets.
While many longs with Sirius point out how Pandora is "no SIRI" and they are correct, today's earnings release demonstrates a likely lack of opportunity for Sirius and I would expect the market to price the smaller pie into Sirius in the coming week or two. A lower tide lowers all boats and a lower revenue stream means one less opportunity for Sirius. The June $2.00 call options are beginning to appear attractive to me as a short. With a large by my standards PE ratio of over 22 and an option premium of around $0.32 I have started to track it again for a short entry.