Pandora Bears Think It's Time To Cover Your Short

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About: Pandora Media (P)
by: Orange Peel Investments
Summary

We predicted Pandora's demise from the mid $20 level to mid single digits.

The stock has continued to get hammered after it was made clear to the amrket that a buyout wasn't happening.

But here at $7, at all time lows, the risk far outweighs the reward of being short.

By Parke Shall

Today we are throwing in the towel on our criticism of Pandora (NYSE:P). This is not to say that we don't think the stock can go lower, or even eventually significantly lower, but just that we will be curbing our public criticism of the company for the time being as shares have finally hit a mid-single digit target that we first argued the company was worth several years ago. We argued just last week that the company could head under $8, despite its new investors.

Pandora is a company that we have been critical of over the last two years, claiming its stock would fall to mid single digits, where it currently is. We wrote a series of articles dating back many months arguing that Pandora would not be bought out and that the company may actually wither away on its own. For the most part, we were dead on accurate.

P Chart

P data by YCharts

So far, that case looks like it'll continue to hold water as Pandora stock finished last week at an embarrassing $7 per share, astoundingly still giving the company over $1.6 billion in market capitalization. While we still think this valuation is ridiculous, pressure on the price lower - combined with the fact that the company has a revamped its cash pile and brought on new investors - makes us cautious enough at these levels to take our victory lap on our Pandora call and look ahead at what future scenarios may hold for the company.

You can read our entire series of articles on Pandora by clicking this link. Dating back a couple of years we have always argued that the company would eventually be outperformed and out-hustled by other participants in the streaming music space. When Apple (NASDAQ:AAPL) Music was first announced we stated clearly and concisely that it would be a Pandora killer and when Spotify (MUSIC) started to get popular with its on-demand library style and larger portfolio of artists and songs, we also named that as a specific threat to Pandora.

The crazy thing is you don't need to be some Harvard financial analyst or technological guru to understand Pandora's limitations as a company. By now, it should have been able to have turned a small profit and its music library should have grown more alongside of its geographical outreach. But unfortunately that was never the focus at Pandora and anybody who listens to it understands that it gets repetitive very quickly; the variety of music is limited and the advertisements are painful.

While Pandora did seek to alleviate these problems by offering an advertisement free paid service, by then it was too late. Apple and Spotify were already offering similar services but just with significantly more music and significantly more choice.

Moving away from the product and onto the financials, all one has to do is take a quick look at the company's cash burn and net income figures. The company appears to have little hope of becoming consistently profitable in the future as its topline growth has waned alongside its user numbers.

P Revenue (<a href=

P Revenue (NYSE:TTM) data by YCharts

At this stage in the company's history, where it has been public for a couple of years after an IPO as a start up company, Pandora is expected to be at a aggressive stage in its growth still. For comparison, look at how technology companies like Facebook have grown just a couple of years into its IPO.

FB Chart

FB data by YCharts

And so the story goes. It was very clear to us that Pandora did not have the growth momentum or the underlying fundamentals to make its valuation last. As the stock shot up from $10 to $20-$30, all that was supporting it was a thin pocket of air that gave way as competition surfaced and Pandora's product stayed the same.

From here, who knows where the story goes?

The company's capital needs will continue to be intense, burning about $200M per year. We were dead on with our analysis that the company was a mid to high single digit stock at best and Pandora's current share price reflects it. With the recent investment being made and convertibles that convert at about $10.50 per share, as well as a couple larger name investors joining the fray, we certainly don't think the potential reward remains great enough to short Pandora at these levels.

While we are convinced that the company is not going to get bought out, as the stock gets more and more compressed we believe that the risk here is on those who decide to short at these levels. While we have no position in Pandora after being short on and off more than once, we do think it is time to curb in our public criticism of the company.

From here at $7, we are less confident that the path is definitely going to be lower for the company, especially given prior buyout interest from Sirius XM (NASDAQ:SIRI) at $10 per share. At the time, that seemed like an insult. Now, it seems like an almost 50% premium to market. We will stay on the sidelines and continue to monitor the story but we don't believe Pandora is a good short at $7.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.