After Pandora Media Inc (NYSE:P) stock dropped sharply in recent days, long-term investors can buy Pandora stock with very little risk and a tremendous potential reward.
The risk posed by Pandora stock is very low for two main reasons. First of all, the $480 million investment in Pandora by Liberty Media Formula One’s (NASDAQ:LMCA) Sirius XM Holdings (NASDAQ:SIRI) removes most of the bankruptcy risk that the company had been facing, as the deal greatly strengthens Pandora’s balance sheet and Liberty isn’t going to throw away its investment by letting P go belly up anytime soon.
Secondly, Liberty previously made an $8 per share offer for Pandora. Pandora stock is now trading just slightly above $8. Although SiriusXM’s’ deal with P prohibits SiriusXM from buying anymore of Pandora’s stock in the next 18 months, it’s difficult to envision a scenario in which Liberty/SiriusXM would not be willing to pay at least $8 per share for Pandora in a year-and-a-half.
For such a scenario to play out, P would have to be worth less in Liberty’s eyes after it began helping to manage Pandora — via the representatives that it will appoint to Pandora’s board — than before it started doing so. It seems improbable that Liberty would have such a viewpoint.
The Reward
Why is the investment’s potential reward very high? Let’s start with Liberty’s track record when it comes to SiriusXM. When Liberty first invested in SiriusXM in 2009, the satellite broadcaster was on the verge of bankruptcy and its stock was trading at less than 34 cents. Today the shares are worth around $5.15 each.
Liberty can help Pandora in many ways (besides shoring up its balance sheet and preventing it from going bankrupt.) It can introduce SiriusXM’s sophisticated marketing techniques to Pandora and enable Pandora to boost its marketing budget. It can align the incentives of Pandora’s executives more closely with the interests of the company’s shareholders.
It can introduce Sirius’ content and in-car technologies to Pandora. And as FBR Capital analyst Barton Crockett pointed out, it can cut Pandora’s costs, help Pandora hire better management and enable it to identify and make some great deals.
Nor was P completely bereft of powerful positive catalysts before Liberty’s investment. The company recently started using technology that will enable marketers to personalize their ads on Pandora. It also recently began enabling advertisers to show muted videos in conjunction with their ads. Both of these innovations should make the company’s ads much more appealing to marketers.
Additionally, as of the end of last quarter, Pandora had a very impressive monthly active user base of 76.7 million, representing a huge listening audience that can be better monetized and persuaded to listen more often.
Moreover, Pandora’s revenue per thousand ads, or RPM, jumped 12% last quarter, versus the same year earlier. Finally, it apparently has many advertisers with big names and pretty deep pockets, including eBay Inc. (NASDAQ:EBAY), Facebook Inc (NASDAQ:FB), LinkedIn and Wal-Mart (NYSE:WMT).
Pandora stock may slide a little further in the near-term as shorter term investors who were expecting a takeover deal sell the shares. And as Oppenheimer analyst Jason Helfstein, who downgraded the stock today, pointed out, Liberty’s improvements will take some time to play out.
But the low risk posed by Pandora stock over time, combined with Liberty’s stellar track record with Sirius, the many positive changes that Liberty is likely to implement over the longer term, and Pandora’s existing positive catalysts, make Pandora stock a definite buy for longer-term investors.
As of this writing, Larry Ramer did not have a position in any of the stocks named, but he may initiate a position in Pandora stock soon.
