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.
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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