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

The technology giant is already in negotiations with various labels to provide content on its service. A long term relationship and Apple Inc. (NASDAQ:AAPL)’s famous negotiation skills will ensure that it will not have to pay royalties as high as Pandora Media Inc (NYSE:P).

The new streaming radio service can be a sign of trouble for iTunes and result in cannibalization. The company already earnings around a billion dollars from its Music related product and services; the streaming radio service can push this figure even. The primary investor concern will be the type of streaming service that Apple Inc. (NASDAQ:AAPL) offers. If the company mimics the ‘Genome Project’ and allows the consumers to register their preferences, the margins can fall dramatically due to higher royalty payments.

Conclusion

Pandora is trading at exceptionally high forward P/E of 56x and P/S of 5.6x. At these valuations, the company is highly overpriced and a perfect candidate for short selling. Industry rival Sirius XM Radio Inc (NASDAQ:SIRI) is trading at a forward P/E of 28x and 8% discount to mean sell side target price. Sirius XM Radio Inc (NASDAQ:SIRI) is a much better investment option because basic differences in its business model ensure that the company doesn’t pay super high royalties and turns a profit.

Apple Inc. (NASDAQ:AAPL)’s radio ambitions will not affect valuations of Sirius because the tech giant will be targeting consumers from the iOS universe. A point of concern for investors can be the slight decline in ARPU (Average Revenue Per User) for 20 million paid subscribers of Sirius. This decline is primarily due to an aggressive discounts strategy by the company to keep out major players like Google, Apple Inc. (NASDAQ:AAPL) etc.

Pandora Media Inc (NYSE:P) has rallied almost 90% since the start of this year and is highly over valued at these levels. The launch of Apple Inc. (NASDAQ:AAPL) radio service will a significant blow to Pandora’s valuation and can be immensely rewarding for short sellers.

The article A Good Short Candidate originally appeared on Fool.com and is written by Mohsin Saeed.

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

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