Pandora Media Inc (P): Don’t Buy the Dips!

The “ease of use” benefit may ultimately give Google Play the upper hand in the battle for streaming music listeners.

As Google Inc (NASDAQ:GOOG), Apple and other offerings such as Spotify begin to compete for listeners ears, potential profit margins will be squeezed and it will become all the more difficult for Pandora to substantially grow profits.

Unreasonable valuation even based on optimistic expectations

The primary argument for owning Pandora Media Inc (NYSE:P) is that the company will eventually grow profits to a level where its current stock price makes sense. But even given analysts’ optimistic profit expectations for $0.27 per share next year, the stock’s valuation still looks incredibly rich.

By this measure, investors are willing to pay roughly 50 times the earnings that may or may not be generated in the year ending Jan. 31, 2015. This is a tremendous premium for any growth stock, much less one with the competitive pressures and profit margin issues that are plaguing Pandora.

At this point, it appears that the best-case scenario would be for Pandora’s stock price to tread water for several years while the company struggles to build enough mass to overcome the variable cost challenges of its business model.

On the other hand, a more disappointing outcome for investors would be a continued drop in the stock as investors realize that although the company has a tremendous product, it is very risky as an investment.

Whether Pandora treads water for a few years or declines rapidly, there are plenty of better growth opportunities with significantly less risk. I would urge investors to liquidate positions in Pandora Media Inc (NYSE:P) and resist the urge to buy the dips until the stock price more appropriately matches the earnings potential of the underlying company.

The article Pandora Media: Don’t Buy the Dips! originally appeared on Fool.com and is written by Zachary Scheidt.

Zachary Scheidt has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Zachary 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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