Pandora Guidance Anything But Reassuring

| About: Pandora Media (P)
This article is now exclusive for PRO subscribers.

Off the bat, let's get it out there that I'm bearish on Pandora (NYSE:P) long-term. I feel that the company is far overvalued at a market cap of over $5 billion, is going to start to bleed listeners to iTunes Radio and is going to have a hard time continuing with its current valuation without turning a serious profit - quickly.

But that doesn't make me any less of a realist. Regardless of my stance, both analysts and myself were looking for a report that was nothing short of explosive from Pandora to continue to justify its valuation - and while Pandora's recently earnings were good, they weren't great.

Pandora has traded well for investors, recently pushing its all time highs over $31/share. Pandora has yielded an astronomical 270% for investors over the last 12 months alone.

(Click to enlarge)

Earnings were released Thursday, after the bell. Pandora's revenue was up 50% YOY and EPS was .06 (excluding items), which was what analysts were expecting. Revenue was a beat, EPS was a meet.

The LA Times Reported:

Its mobile revenue, generated by ads on the streaming music service's smartphone and tablet applications, increased 58% year-over-year to nearly $105 million.

The company posted a net loss of $1.7 million (one cent per share), after generating net income of $2.1 million during the prior-year quarter, as its costs increased 54% to nearly $182 million. Excluding one-time items, Pandora's earnings were six cents a share, about what analysts were expecting.

For the third quarter, Pandora's listening hours were 4.18 billion, up 17% from last year. However, as I've stated in the past, this is a product Pandora recently removing listener limits, and nothing else. This metric should be looked at closely next year, as these are "skewed" results to end the year for Pandora's listening h

The guidance failed to "wow" investors - as Pandora guided for .02 to .04 for the fourth quarter, lower than the .04 that analysts were expecting.

However, Pandora continues to monetize through mobile ads, as reported in

Pandora continues to monetize effectively across the board," stated company CEO Brian McAndrews in the earnings release, highlighting the 58% growth in mobile advertising in the quarter. That rate was slightly below the 61% rate projected by JP Morgan analyst Doug Anmuth in a research note this week.

Advertising, which remains Pandora's main revenue stream, increased 36% to $144.3 million from a year ago. Subscription sales, while smaller, continued to grow at a faster clip, up 156% to $37.2 million.

Yet the growth isn't quick enough and the guidance fell short for next quarter. Again, Apple offered an update on its own conference call a couple weeks back, stating that iTunes Radio now had over 20 million listeners, and was continuing to grow. That number is likely high yet as of today.

At the time, this did little to bother Pandora's stock, which is seemingly a case of people ignoring the obvious - that Apple (NASDAQ:AAPL) is eventually going to cannibalize on Pandora's listeners. That will lead to success for iTunes Radio and an inevitable "major" correction for Pandora in 2014, in this investor's opinion.

In addition to the continued Apple threat, Pandora needed to at least meet or exceed guidance for the fourth quarter. So much of this company's valuation is based on forward looking potential, that any disruption in that is likely going to lead to unease from the market.

I'm predicting a pullback to the $25 region over the coming weeks on the heels of the guidance, and a reconsolidation while the market waits for more news.

While Pandora certainly did have a "good" quarter, it was overshadowed by its poor guidance, which is the governing factor for a company that's valued in such a forward looking manner [see LinkedIn (LNKD) or Tesla (NASDAQ:TSLA)]. I remain bearish on Pandora both short and long term.

Best of luck to all investors.

Disclosure: I am short P. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.