A 13G filed with the SEC has disclosed that Steadfast Capital Management crossed the 5% ownership threshold in Pandora Media Inc (NYSE:P) in late November and most recently owned 8.9 million shares of the company’s stock, representing 5.3% of the total shares outstanding. Pandora is down 11% in the last five days after reducing its guidance for the fourth quarter of its fiscal year (which ends in January), and is now down 55% from its levels shortly after its June 2011 IPO, joining disappointing IPOs such as Zynga Inc (NASDAQ:ZNGA) and Groupon Inc (NASDAQ:GRPN). Steadfast is managed by Robert Pitts. The fund’s 13F for the end of September had revealed a position of 7.1 million shares in Pandora (see Steadfast’s favorite stocks), so we can see that it has been buying the stock over the last two months.
Pandora’s most recent quarter showed a 60% increase in revenue compared to the same period in the previous fiscal year. Costs have risen about in line with sales, with the result being a large percentage increase in earnings (however, Pandora only earned a penny per share for the quarter). This represented a substantial improvement over the first half of 2012, when the company had been unprofitable. However, cash flow from operations has been negative year to date.
Pandora Media Inc is expected to finish the current fiscal year with losses of 9 cents per share, and improve to losses of 1 cent per share for the fiscal year ending in January 2014. That is a nice improvement, but with a market capitalization of $1.3 billion we’d like to see at least some profits on a forward basis. The growth rate is very high, but so far we haven’t seen many signs that the company can continue growing on the top line without accompanying expenses.
Crosslink Capital, which is co-managed by Michael Stark and Sy Kaufman, owned a little under 34 million shares of Pandora Media Inc at the end of the third quarter; it was by far their largest position in a publicly held company (check out more of Crosslink’s top stocks). Crosslink had invested in Pandora when it was privately held. Billionaire Ken Griffin’s Citadel Investment Group increased its stake in the company to 2.7 million shares (find more stock picks from Ken Griffin). The most recent data shows that over 50% of the outstanding shares are held short, so while we see some hedge fund activity on the long side we have to conclude that a number of top market players- as well as traders- are bearish on the company.
We’ve also recorded a number of insider sales at Pandora in November and December. While insider sales often make sense for diversification purposes, they are still important to note. Finally, quite a bit of Pandora’s business prospects depend on its relationship with Apple Inc. (NASDAQ:AAPL), which has the potential to develop and operate its own streaming radio service. Read our latest coverage on Pandora’s relationship with Apple. That sounds a bit risky to us.
We would compare Pandora to Sirius XM Radio Inc (NASDAQ:SIRI). Sirius is profitable, but struggling as its earnings have been down substantially recently. Net income is also expected to fall in 2013, but the market apparently expects the company to improve from that point as the forward P/E is 28. We don’t think that this stock is that high a priority to research further either- it seems that there’s quite a bit of volatility and uncertainty when it comes to Sirius’s numbers.
Pandora doesn’t seem like a good stock to buy, even after its recent decline. The company is dependent on strong sustained growth, given that it’s only barely profitable after a high revenue growth rate over the last year, but also dependent on that growth not attracting competition. That sounds like a very narrow window for success, and it’s probably better to skip this opportunity.
