Most companies go through cyclical downturns from time to time, but these downturns are only temporary if the underlying business model of the company remains sound. However, the downturns in Valeant Pharmaceuticals (VRX), Pandora (P) and Twitter (TWTR) appear to be signs of major identity crises.
Valeant Pharmaceuticals (VRX)
VRX is about the hottest Wall Street controversy you can find today. VRX is currently trading at around $32 per share. But don’t blink or you might miss one of its wild 20%-plus one-day swings. The market seems to have no idea out just what VRX stock is actually worth.
Although nobody seems to know whether or not there is legal wrongdoing at Valeant, the recent political focus on drug pricing has brought to light the vulnerability of VRX’s business model. Rather than relying on research and development for organic growth, the company has a history of buying drugs and then jacking up prices.
“What Valeant does is not simply raise the price but rather it pushes the limits of every vulnerability it can find across the entire U.S. healthcare system,” Citron Research said of VRX back in October.
If this assessment is true VRX could really be the “house of cards” that Morgan Stanley suggested it was way back in 2014. The company will either have to dramatically change its business model or run the risk that the house will eventually fully collapse.
Pandora (P)
Pandora is in a really tough business. The company is facing constant pressure from the likes of competitors Apple Inc. (AAPL) and Spotify, and it’s becoming clear that streaming radio is not a winning game. For most of its existence, P has worked the same way that commercial radio does: The songs are free because they have commercials. But Apple Music and Spotify now offer on-demand services for free that allow users to pick out which song they want to hear.
When all was said and done, Pandora lost $169 million in 2015. Its best path forward may now be to sell itself to a larger media company. Pandora was reportedly in talks with Morgan Stanley about a potential buyout earlier this year. In the meantime, Pandora will have to make some major changes to turn its business around.
Twitter (TWTR)
TWTR has done just about everything it can possibly do to expand its current business model. Unfortunately, it’s still not making any money. Slumping user growth is a sign that the company has reached the end of the line in terms of scaling up its operations. Now, the future of TWTR rests on its ability to adapt and find a new way to grow. So far, it has been unable to do so.
Fortunately for TWTR, Facebook (FB) is an excellent example of how a social media company can re-define itself and become a financial hit. After a horrendous public debut, FB has bounced back in a big way. However, it took some innovative thinking and willingness to aggressively adapt its original online model to mobile.
Disclosure: As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.
