Pandora Media Inc (P), Apple Inc. (AAPL) & A Good Short Candidate

It is extremely difficult to assess the potential of companies relying on online display advertisement. The access to a global clientele increases the variation of estimates and in turn leads to varying assumptions about their true potential or value. The most successful online display advertisement businesses usually rely on content generated by users e.g. Facebook, YouTube, Yahoo, and Twitter etc. The high cost of content makes it pretty tough, for businesses paying for content and distributing it for free, to show bottom-line strength.

Pandora Media Inc (NYSE:P) is an example of a company which has shown consistent revenue growth but little bottom-line improvement. Pandora Media Inc (NYSE:P) pays for digital content and distributes it for free to its users, making revenues mostly from advertisement. The company has a 5-year average revenue growth rate of 97% but has still failed to show any bottom line improvement. The stock has risen almost 90% so far this year, and it’s high time to analyze if this rally is justified. A comparative analysis of valuations show that rival Sirius XM Radio Inc (NASDAQ:SIRI) is trading at a cheaper valuations, making it a more attractive investment.

Fundamentals

Pandora reported its first-quarter earnings report last week and added to its string of bottom-line failures. The company had predicted a loss of $0.01 to 0.02. The market expected Pandora to post a profit of $0.02. The company failed again on the bottom line, posting an EPS of $-0.16 on revenues of $125.5 million.

The share prices rose almost 10% even after the large EPS miss. It is the same old story with Pandora, beating on revenues but expenses continuing to outpace revenue growth. One of the primary reasons behind the stock price appreciation is the upward adjustment by Pandora to full-year expectations. The company expects full-year EPS to be around $-0.02 to $0.08 on revenues of $615 million to $635 million.

Pandora’s listening hours have increased 35% year-over-year to 4.18 billion but at the same time royalty payments have also increased by 48%. The numbers raise some serious concerns about the ability of Pandora’s business model to show any bottom-line strength.

Competition

Pandora Media Inc (NYSE:P) is the leading player in the internet radio arena, but there have been rumors for quite a while that Apple (NASDAQ:AAPL) is trying to launch its own internet radio service. A large portion of Pandora users come from the iOS universe and any such move could be a devastating one for Pandora Media Inc (NYSE:P).

According to recent reports, Apple Inc. (NASDAQ:AAPL) is in the final stages of launching its own streaming radio service. The company might announce the project as soon as June 10, during the annual developer’s conference. The service will not be available to customers until later this year and probably will be launched along with iOS 7.