Hello and welcome, readers. One of the first lessons to learn as an investor is that a great product or service doesn’t necessarily make the parent company as good investment.
Consider the case of Apple Inc. (NASDAQ:AAPL), which has been the obvious exception to the statement above. From 2008 through late 2012, Apple was one of the best performing stocks in the Nasdaq, as rising demand for the Macbook, iPhone, and later the iPads led Apple to become the world’s largest company by market capitalization. However, as evidenced in recent months, there can be a difference in demand for a company’s products and the stock. Shares of Apple have fallen to the low $400’s after reaching an all-time high of $705 in late September.
Shares of Pandora rose 17.5% on Friday, March 8 following the company’s earnings report.
Here are five reasons to be grateful for the overnight pop and take profits from Pandora:
A “less bad than expected” quarter doesn’t translate into a good quarter. Pandora Media Inc (NYSE:P) lost ($0.04) per share, in contrast to analyst expectations of a loss of ($0.05) per share. Ticker symbol P hasn’t been profitable in its two-year history as a public company.
The share price appreciation following the earnings release was driven by a short squeeze. As of Feb. 15, short interest in Pandora stood at 22.2% of the outstanding shares.
Royalty costs are going higher, as evidenced by recent articles in the NY Post and Wall Street Journal. February listener hours at Pandora Media Inc (NYSE:P) reached 1.38 billion, a 42% year-over-year increase. At face value, this appears to be a positive, but in reality it’s a negative. The company is spending more money on licensing music at a time when advertisers haven’t committed to the Internet radio platform.
Both Apple and Google are planning to launch their own streaming music services. The only question is when, not if. The Financial Times reported as recently as Feb. 23 that Google is readying its own service. Apple’s iOS 6.1 also contains files indicated for streaming music.
Pandora announced the resignation of it’s long-time CEO, Joseph Kennedy, during the March 8 earnings call. The departure comes at a time when Pandora still hasn’t demonstrated that the company is able to monetize it’s growing listener base.
Here are five reasons to give thanks and take profits in Netflix, Inc. (NASDAQ:NFLX):
Similar to Pandora Media Inc (NYSE:P), Netflix has virtually no earnings. The stock is trading at 600x price-to-earnings, indicating it would take 600 years in order to break even based on the company’s current profitability.
Although Netflix, Inc. (NASDAQ:NFLX) has unquestionably disrupted the traditional TV market, subscriber growth appears to be peaking and competitors such as Amazon and Hulu are gaining traction.
Amazon is launching its own original content through a “Prime Instant Video” platform. Similar to the reputation Wal-Mart developed in the 90’s, Amazon has a refuse-to-lose mentality and is willing to accept razor-thin margins in order to gain customers and market share.
Bank of America Merrill Lynch is one of few firms on Wall Street that has a bearish view on Netflix, Inc. (NASDAQ:NFLX). The analysts believe that U.S. subscribers will peak at 35 million, and that fundamentals haven’t changed despite the large run in share price. BAML has a $95 price target and Underperform rating on the stock.
Activist investor Carl Icahn stated in a telephone interview with Bloomberg that he is not planning to take a board seat. Although Icahn has denied the sale of his Netflix shares, the stock sold off on March 4 on rumors that the billionaire was taking profits.
Reader’s Consolation in CoinStar
Unlike Pandora and Netflix, Coinstar, Inc. (NASDAQ:CSTR) has a history of actually making money. The company has earned more money in the last year than Netflix, Inc. (NASDAQ:NFLX) and Pandora’s collective history as public companies. Coinstar is a leader in the automated retail industry, with its flagship RedBox DVD rental business and Coinstar coin machines.
Investors are concerned that Coinstar, Inc. (NASDAQ:CSTR) has slowed the expansion of RedBox kiosks based on closing an assembly plant in Creedmore, North Carolina. However, management has indicated numerous times to Wall Street that the progression of RedBox retail outlets would slow.
Coinstar is also in the process of launching RedBox Instant, a joint venture with Verizon Communications Inc. (NYSE:VZ). This service will directly compete with Netflix and Coinstar, and is able to leverage the power of Verizon’s wide customer reach and network access. I believe the RedBox Instant service is an underappreciated growth opportunity for Coinstar.
Revenue at Coinstar, Inc. (NASDAQ:CSTR) has grown 19.3% in the last 12 months, and the stock trades at an attractive 11.5x price-to-earnings.
Foolish Bottom Line
In conclusion, I recommend that readers take profits in Netflix and Pandora Media for the reasons outlined above. If you have an interest in emerging media, Coinstar offers the best investment in my opinion. The company has a strong foothold and greater diversity with its RedBox kiosks and Coinstar vending machines, in addition to growth opportunities with RedBox Instant and Verizon Communications.
Thanks for reading, and consider subscribing to my posts for more Fool ideas on outperforming the market.
The article 5 Reasons to Sell Netflix and Pandora, and Buy Coinstar originally appeared on Fool.com and is written by John Macris.
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