This Company is Still a Good Short Opportunity

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a recent report on Pandora (NYSE: P), I discussed the short potential of the company. In the last few months, the stock had climbed approximately 40% despite any fundamental improvement. Pandora has been facing problems of increasing content acquisition costs and declining margins. The company had pinned its hopes on the Internet Radio Fairness Act to turnaround its fortunes, but the bill has failed to get the required momentum.

Quarterly Results

Pandora reported its quarterly earnings report the other Friday. The market was expecting Pandora to report an EPS of $-0.05 and revenues of $122.8 million. In stead, it managed to report earnings of $-0.04 on revenues of $125.1 million. The results beat analyst estimates by a small margin, but show a revenue improvement year over year. The revenue has shown a significant improvement y/y, but despite this increase the company reported a lower EPS compared to $-0.03 in the same period last year. This again shows that the growth in revenues is not effectively translating into bottom line improvement.

According to company disclosures, the market share of Pandora has significantly improved over the last few years. The company currently has an 8% share of total radio listening in the United States. The management tone was pretty bullish on its ability to target the $14 billion mobile advertisement market. A primary reason behind the growth of Pandora has been the company’s ability to monetize mobile. A major problem with internet advertisement companies has been their ability to monetize mobile. Google (NASDAQ: GOOG) is facing serious problems in driving revenues from its mobile traffic. A large component of Google’s advertisement revenues is basically display advertisement, which is relatively harder to integrate onto a mobile platform. On the other hand, the advertisement model of Pandora is less affected by mobile because its advertisement is in audio format.

Apple Radio

A major portion of Pandora’s traffic comes from Apple (NASDAQ: AAPL) devices; therefore, the threat that Apple might start its own radio service was catastrophic for Pandora’s stock price. According to recent reports, Apple has delayed the start of an online radio service that would have been a competitor to Pandora. The decision was taken after talks between Apple and record labels ended in a stalemate. The issues that led to the stall are still unknown because neither party has released an official update on the matter. This should not be considered an end of Apple's radio ambitions, as the company still plans to start a advertisement-based radio service.

Bottom line

Pandora has reported better than expected revenues and beaten the Street’s EPS estimates. In other news, the Chairman and CEO of Pandora has resigned after spending almost 9 years with the company. Mr. Joseph has been in charge of the Pandora since 2004, and will continue to do his duty until his successor takes charge.

Pandora has just avoided a bullet with Apple halting its radio service for now. If the tech giant creates such a service in the future it could very well mean the end of Pandora. The company is already facing troubles from low margins and a competitive market. As a large portion of Pandora’s traffic comes from Apple devices, which makes it is highly likely that listeners will prefer to stay in the Apple ecosystem, if the tech giant starts a rival service. Google is another serious contender when it comes to branching a radio service, but there is still no official news on the matter. The company already has pretty solid internet advertisement machinery in place and can generate revenues from both display and audio commercials. I believe Pandora is still an attractive short target due to small margins and its inability to reduce its content acquisition costs.

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