Pandora Media Inc (P) Stock Has 33% Upside After Q2 Earnings

Advertisement

Pandora Media Inc (NYSE:P) on Monday reported earnings from its second quarter — the last quarter that contains data prior to the recent changes at the company. Despite a decline in P stock this morning, there’s actually a fair amount of good news in there, not just the fact that Pandora continues to lose money.

Pandora Media Inc (P) Stock Has 33% Upside After Q2 Earnings

Revenue came in at $376.8 million, which was up 10% year-over-year and ahead of the $368.2 million consensus. This obviously infers growth in both advertising and subscriptions, and that’s exactly what happened for Pandora.

Advertising revenue increased 5% year-over-year to $278.2 million. Both ad loads and improvement in CPM contributed to this increase, both of which are good signs. On the subscription side, there was a very healthy 24% increase to 4.86 million subscribers. The result was a 25% increase in revenue to $68.9 million.

Pandora reported 76 million active listeners, generating 5.22 billion listener hours.

Loss was 21 cents per share vs. an expected loss of 24 cents. However, don’t fall off your chair at the GAAP reported loss of $275 million. Much of this was related to a $132 million writedown of Ticketfly, which was sold, and $23 million in contract termination fees, and a bunch of other items like stock-based compensation.

Pandora has more than $243 million in cash and investment, and $342 million in manageable debt.

Looking Forward

So with P stock at about $9, what might the future hold?

I consider Pandora stock to be a “special situation,” in which a likely acquisition of the entire company will occur. “Special situations” are one category that my stock advisory newsletter, The Liberty Portfolio, looks for — outsize gains regardless of market direction.

To me, the key lies entirely with Sirius XM Holdings Inc. (NASDAQ:SIRI), which recently made a $480 million investment in Pandora stock. Or what I should say is that the key lies entirely with Dr. John Malone.

Malone is one of the savviest investors in history. His Liberty Media already owns more than two-thirds of SIRI, and it keeps increasing because of the share buyback. Eventually, Malone will buy the rest. This is how he operates. He takes positions in companies that have phenomenal cash flow, and slowly increases his stakes.

Sirius XM was offered $15 per share for all of P stock last year and was rebuffed. An $8 offer was made a few months ago and rejected, with the $480 million convertible preferred deal being the end result.

Make no mistake — Malone did not invest in a money losing company with negative free cash flow unless he had specific designs. I don’t know exactly what they are, but I do know that P is really the only viable ad-based music listening model out there.

Now, normally Malone and his partner Greg Maffei buys businesses, and by-and-large leave their acquisitions alone. They will take board seats, however, and sometimes replace management when there are future transactions to come. We saw the former with Starz and Lions Gate Entertainment Corp. (USA) (NYSE:LGF). We saw both with the move on P stock. CEO Tim Westergren got bounced. SIRI controls 16% of the company, and 33% of the board.

I don’t see a new CEO coming from within the company. Malone will want someone who understands this business and isn’t part of a broken team, so I’m going with Jim Cady from Sirius XM.

Bottom Line on P Stock

After the Sirius investment, I purchased Pandora stock in the mid-$7 range. My expectation is that, over time, SIRI will buy up the rest of the company. We’ve seen the stock trade almost up to $10 over the past few months. I think, if the business gets turned around, and starts to cash flow the way Malone likes, the eventual buyout price will happen around $12 per share.

I think the deal happens within 24 months. From the date that Starz got seats on Lions Gate’s board to the merger, it took only 22 months.

With P stock at $9, I would consider this a “special situation,” with 33% upside in 2 years.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He owns Pandora stock. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/pandora-media-inc-p-stock-has-33-upside-after-q2-earnings/.

©2024 InvestorPlace Media, LLC