Summary
- We have long held a $12 price target on Pandora.
- The stock popped Monday on news of Spotify user base growing.
- This is bad news for Pandora, the market has this confused.
By Scott Tzu
Our last piece on Pandora (NYSE:P) pointed out that we weren't amused by insider buys from the company's CEO. We made our case for our $12 price target, namely that the company is overvalued on basic metrics in a market that seems unsure if its going to be bullish in 2015. We noted at the time that the CEO's insider buys seemed like a token buy:
We think this is ridiculous. We're not buying it because it seems like a token buy at this point. In September of 2013, Mr. McAndrews was awarded 500,000 shares of Pandora stock. In August of 2014, Mr. McAndrews sold 49,608 shares of P for $28.17. This constitutes $1.3 million in stock, and more than covers the $464,499 it cost to rebuy 25,000 of those shares. Maybe McAndrews will deliver on next week's conference call. Or maybe this was to generate excitement for what could be less-than-stellar news next week.
We also said that the buyout theory for Pandora is unlikely at the company's current valuation, even though the company had a good looking balance sheet. Since we've written about the company, we've been more right than wrong. Pandora has experienced almost a 50% drop from its highs this summer.
Today, the company's rival in Spotify announced it had a total of 60M users. Pandora was bucking a downward trend of the indices earlier in the day because of this news. The market seems to think that Spotify adding users is supplementary good news for Pandora, while we believe it to be a sign that Pandora's best days are behind it.
What people don't realize that with streaming music, a rising tide doesn't lift all boats. Spotify is direct competition for Pandora and the news that Spotify is growing should not be boosting Pandora shares, especially at its current valuation.
With iTunes Radio, Spotify and Google Play all confirmed to be gaining ground, Pandora's valuation needs to be put in check. Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG)(NASDAQ:GOOGL), which are both diversified in many other areas as companies, pose the biggest threat to Pandora. Spotify is theoretically the "purest" competitor because streaming music is their sole operation. Their gains do not mean that Pandora will benefit. These companies are at two separate places in their adoption cycles and we believe Pandora is already saturated.
Regardless, the company still trades at about 40x next year's earnings estimates, if it makes next year's estimates, which we predict it will not. The company still carries a $3.55 billion market cap, and only has a book value of about 2.61. While we continue to admit that the company's balance sheet isn't in horrible shape ($316M in cash and no debt), we don't believe sunnier days are ahead until Pandora's stock price moves further south, where it will then be attractive to a potential bidder.
We keep our $12 price target on Pandora and are now short.
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