by Tom Taulli | November 15, 2013 12:28 pm
Pandora (P) has been in tune with investors this year, even though short sellers having been pumping up their positions in P stock. In fact, shorts currently make up about 26% of the float for Pandora stock.
Still, Pandora stock is up a sizzling 241% so far this year. In fact, in today’s trading, P stock has ticked up about 7% — partially because an analyst from JPMorgan raised the price target on Pandora stock from $25 to $35.
Even with the huge bull move, the valuation on Pandora stock is still fairly moderate — especially compared to the multiples of other social operators. P stock is currently at about 10X trailing 12-month’s revenues, which compares to Twitter’s (TWTR) 45X, Facebook’s (FB) 17X and LinkedIn’s (LNKD) 19X.
But the relative discount on P stock seems warranted. After all, the core business model is far from ideal. For fiscal 2013, Pandora shelled out 55.9% of total revenues for content acquisition.
Another reason it’s surprising P stock investors continue to big the stock higher? Pandora has struggled with achieving profitability. Since inception in 2000, Pandora has generated an accumulated deficit of $139.6 million.
After all this time, you would think Pandora stock investors would want the company to begin bolstering its bottom line, especially since it has substantial revenues.
Unfortunately, things could get even worse for Pandora. The content fees are set by federal statute but in 2015 they will be reset — and it is far from clear what the levels will be. And the recording industry is well-known for be extremely tough with negotiations. That should worry P stock fans.
And in the meantime, Pandora must also contend with the onslaught of intense competition. Just some of the players include RDIO, Spotify and Rhapsody. And the biggest threat for P stock could be from operators like Apple (AAPL), Google (GOOG) and Amazon (AMZN). All these companies have their own mobile platforms, which they can leverage. Oh, and they have tremendous resources and diverse business — which means they can undercut Pandora by making up the loss of revenue from other sources.
It does look grim for Pandora stock in the long run. But these factors are likely to not be problem for P stock for a while — say a year or two — which is fine for hedge funds looking for a quick hit.
Besides, there could still be more room on the upside for Pandora stock because of the relative valuation gap and the continued robust growth in mobile. It should be music to the ears of fast-money investors.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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