Pandora Media Inc (NYSE:P) has been circling the drain for some time, with shares down more than 60% from their 52-week high and off about 80% from their 2014 all-time highs.
But you wouldn’t know that if you have only read the headlines recently.
For starters, Pandora stock popped recently based on a New York Times report that it “has held discussions about selling the company.” That report also happened to hit just before Pandora reported a bump in users over the previous quarter, as well as an increase in total listening hours.
Sounds good for Pandora right?
Well, unfortunately the details are not perhaps as bright as they seem. Here’s why if I were a Pandora stock holder, I would head for the hills on this short-lived pop.
Pandora Buyout Rumors are Just Rumors
For starters, it isn’t really news to me that Pandora is having “discussions” about a sale.
Many smaller companies are perpetually for sale — particularly ones like Pandora or BlackBerry Ltd. (NASDAQ:BBRY) or Twitter (NYSE:TWTR) that are facing trouble turning a significant profit and are seeing growth challenges.
But discussions are one thing, and an actual offer is completely different.
It seems highly unlikely anyone would pay $1.6 billion for the Internet radio company right now, which is what the market cap is for Pandora stock at present, just like it’s unrealistic anyone will pay $10 billion for Twitter or $3.5 billion for BlackBerry.
I say that partially because of the sheer price tag, but it’s also a “risk off” environment where deals aren’t going to be made easily. Plenty of private equity firms have their hands full protecting other investments rather than making new ones.
Sure, Pandora did have first-mover advantage at one time, but it can no longer truly be labeled as innovative or disruptive. Competitors, from Spotify to Apple Music from Apple Inc. (NASDAQ:AAPL), are gaining traction and the idea of an algorithm that serves up similar songs is not exactly a novel concept. All Pandora really has to offer now is a business that doesn’t turn a profit and a stagnant list of some 81 million listeners.
That doesn’t add up to an attractive acquisition target to me, regardless of what the rumor mill may indicate.
And just because I like to play conspiracy theorist, I’ll also mention that Pandora CEO Brian McAndrews also sits on the board of The New York Times Company (NYSE:NYT). It’s worth noting that before you read too much into this “scoop.”
Trends for Pandora Users and Financials Still Stink
Moving beyond buyout chatter, it’s important to look at both the most recent earnings as well as the long-term financials to get a good sense of what’s going on at Pandora.
In a nutshell, more of the same — which is no user growth, no profits and meager revenue expansion.
If you want to be a glass-half-full investor, Pandora said it increased revenue 25% in Q4. It also saw 81.1 million listeners to mark an increase quarter-over-quarter, an encouraging sign after challenges seeing growth in previous quarters.
But those numbers belie serious challenges overall. For starters, Pandora continues to struggle mightily as the costs of content grow. Consider that cost of revenue was up 30% — more than revenue increased year-over-year.
No wonder, then, Pandora continues to operate at a loss.
Furthermore, while listeners were up sequentially, they actually declined by a hair year-over-year so there is no sign that sustainable user growth is becoming a long-term trend.
When you layer in the need to stay light on ads in order to attract and retain users amid competition from Apple and Spotify, the future seems even bleak.
In fact, Pandora itself predicted another operating loss in 2016 as things remain pretty much the same — modest revenue growth, but with soaring costs that make profits elusive.
That doesn’t add up to a compelling reason to buy Pandora stock — either if you’re an individual investor, or if you’re in private equity.
Maybe Pandora will eventually decay to a price level that is attractive, and it can succeed as a private company that has lower expectations for growth.
But that moment is not yet here.
If you own Pandora stock, sell on this brief pop and head for the hills.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.
