Pandora Is A Net Exporter Of Investors' Wealth

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 |  About: Pandora Media (P), Includes: SIRI
by: Stephen Faulkner

Fellow Seeking Alpha author Modernist recently wrote a piece in which he stated that "Pandora Is A Net Exporter Of Content." Within the article he writes on the premise that Pandora (P), while importing content in the form of music, then modifies this content and exports it to the consumer. Because of this added "value" of the music genome project and the customized playlists, this results in Pandora being a net exporter of content.

Modernist makes the assumption, then, that because Pandora should be considered a net exporter of content, this added value should eventually create a profit for Pandora, and thus, makes Pandora a good investment. I disagree, and I honestly feel that all Pandora has been good for-- and all Pandora will be good for at present levels-- is being a net exporter of investors' wealth.

Much of Modernist's article was centered around an article I wrote on April 9th and published on April 10th, stating I had purchased put options on Pandora, and why I had done so. I found it very unfortunate that I was selectively misquoted and misrepresented repeatedly within Modernist's article. Thankfully, the point that I was short, and did not believe in Pandora both short term and longer term, was maintained.

I still maintain that perspective, both on fundamental and technical reasons. I truly believe in using both forms of analysis together to give an investor an edge. Simply basing all of your moves on technical analysis or fundamental analysis can be hazardous. By combining the two, you place yourself in a much better position to realize larger, and safer gains. In the case of Pandora, my put purchase fell in safe territory for me and I'll explain why.

On the fundamental side, I simply do not believe that Pandora has long term staying power, and I recognize that it has short term hurdles to overcome in what is an impatient market. Pandora does take music and mix it up for the user, and give it back to them in ways that generally enhance the listener's experience. If Pandora was the only game in town, this would be great, but it is not. With the various competitors out there-- such as Spotify on the IP delivered side, Sirius XM (SIRI) with satellite and IP delivery and dominant in the "pay radio" space, and terrestrial radio with the lion's share of the "free" radio market both over the air and through IP-- Pandora certainly has a lot of competition.

This competition is beyond Pandora's control, and the free user base is fickle. If Spotify or another service is perceived as "cooler", then Pandora will succumb in short order to the rapid shift from Pandora to Spotify, or any other free service currently existing or due to exist in the future. While some like to lump in Pandora with social media, Pandora is absolutely not social media. Because of this, there is no compelling reason to stay with Pandora when the "next best thing" comes along. This makes Pandora an immensely risky investment even if it was currently profitable.

Pandora is not profitable, and it faces increasing costs for the next few years in the form of royalties. Even if Pandora ramps up advertising revenue (and it absolutely must do so simply to stay alive), the cost of doing business will ramp up as well. This is a horrible situation to be in and it will not get better without some major development with the way royalties are paid out, and soon. This is yet another huge risk, as costs are guaranteed to go up, but income is not guaranteed to go up fast enough to meet rising costs.

Beyond this, Pandora faces limitations in the mobile listening environment until smart phones and data plans provide enough coverage, speed, and data quantity within a user's plan in order to run Pandora reliably and cheaply, such that it serves as a replacement for other forms of radio. I see this time point to be 3 years out or more, which gives time for the larger entities-- namely terrestrial radio and Sirius XM-- to flesh out their IP offerings with "Pandora like" service, as well as layering on their exclusive content. Being ahead of your time before the infrastructure is in place can be an asset, but here I see it as a liability, especially since the infrastructure is not exclusive. The IP highway is open to all competitors.

On the technical side, I have warned of Pandora's $10 support level in several articles. Within my article stating I had purchased my put options, I indicated one of my reasons being that Pandora had broken through this support and looked ready for a sharp decline. Since then, that is exactly what has happened.

Click to enlarge

Click to enlarge

The point of decline below $10 can be seen at the right, matching up with Friday April 6th. Since then the share price has followed the lower line down. This lower line is the lower bollinger band, and I expect the share price to continue lower along this line on an average basis moving forward until it finds new support. My target is $5, and I have every reason to believe Pandora is headed towards this target based on my fundamental analysis of the stock and what the technical analysis is telling me.

To be fair, this may change. Good news may come out from Pandora which halts the decline or even places it in bullish territory. But for right now Pandora is a net exporter of investors' wealth, and should be avoided at all costs, except through short or put positions. Even if you disagree with my fundamental analysis and are bullish, I would suggest waiting to purchase your shares, as you should be able to get them at a much lower price as time goes on.

Disclosure: I am long SIRI April May and June $2 calls. I am long P April and May $10 puts and June $9 puts.