Don't Open Pandora's Box
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Single-letter ticker symbols used to mean something. Companies that possessed them were bulwarks of the economy, including household names such as Sears during its heyday, and they were associated with a certain level of stability and reliability. But now more than ever, you can’t judge a stock by its ticker symbol. Pandora (NYSE: P) is one such case, having taken investors on a roller coaster ride since its initial public offering (IPO).
An Internet radio company, Pandora combines two hot concepts: mobile apps (applications) and Internet media. Specifically, it offers music buffs the chance to create their own radio stations and listen to them anywhere there’s an Internet connection. All they have to do is access Pandora.com from any computer or download the Pandora app for access via cell phone or tablet. Following a common business model in the tech world, it generates revenue from advertisements interspersed within the stations’ playlists and from user fees for ad-free access. And as happens more often than not in the tech world, the nascent market for Internet radio has already attracted competitors, most notably iHeartRadio, which also offers customizable Internet radio and a mobile app and which has been commercial-free for longer than I ever expected.
iHeartRadio is backed by CC Media Holdings (NASDAQOTH: CCMO.PK), the holding company for what’s left of the Clear Channel media behemoth of the early 2000s. (Yes, this is the same Clear Channel that gave birth to Live Nation (NYSE: LYV), which owns concert venues and Ticketmaster, and Clear Channel Outdoor (NYSE: CCO), which owns outdoor billboards.) Its data-guzzling Android app has achieved between 10 to 50 million downloads, versus 50 to 100 million downloads for the similarly data-guzzling Pandora app. Who needs to worry about data overages anyway? It’s not like AT&T and Verizon Wireless haven’t been doing away with truly unlimited data plans.
Upon a positive Q2 earnings surprise and the release of positive Q3 guidance, Pandora stock increased 20% on August 30. It’s not like Pandora made money, though. The company merely broke even. CEO Joseph Kennedy doesn’t foresee profitability (to the tune of one cent per share) until next quarter at the earliest, and only if earnings come in at the top end of the estimates at that. Investors’ enthusiasm is instead due to Q2 revenue of $101.3 million, which included $59.2 million in mobile revenue. These results reflected a 25.4% increase in revenue overall and a whopping 86% increase in mobile revenue.
Now let’s look at Pandora’s performance over a larger time interval. From this perspective, Pandora’s performance exemplifies what happens when a company with a weak business model throws around enough buzzwords to excite Wall Street and Main Street alike. Not surprisingly, it is similar to that of Facebook (NASDAQ: FB), as the graphs below suggest. For a better, more up-to-date look, take a look at this graph. Our interface doesn’t allow me to show Pandora’s full trading history on the same chart as Facebook’s, as their histories differ in length.
First, media hype allows for a strong debut. The morning of the IPO, investors drive the stock price up and all appears well. By lunchtime in New York, however, the tides have shifted. Out of the blue, a period of turbulence has appeared, scaring off consecutive waves of fair-weather bulls and turning into a feedback loop of relentless price decreases. Short sellers start crawling out of the woodwork, until they control an influential percentage of the publicly traded shares, known as the float. In Pandora’s case, shorts control 48.9% of the float and have created a situation in which short squeezes are highly likely, making it difficult to determine whether run-ups in the stock price resulted from positive investor sentiment that can be attributed to actual improvement in the business.
Somewhere along the line, the remaining investors begin to wish they had bought into some nondescript consumer staples manufacturer or regulated utility. They realize that the smart money left in droves once the lockup period expired, and they are angry. (Again, Facebook investors take note.) The moral of the story: if you aren’t invested in Pandora shares directly, do yourself a favor and just stay out of the whole situation. If you own any growth funds, you may have indirect exposure anyway (check out this list of major institutional and mutual fund holders), so you can still benefit from any short squeezes or earnings surprises.
Fool blogger Jonathan Lim has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook. Motley Fool newsletter services recommend Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.