Shares of Pandora Media Inc (NYSE:P) have fallen about 5% from the intraday high last Tuesday. That’s enough of a pullback to at least have investors considering P stock ahead of Pandora earnings on Monday after the close.
![Pandora Media Inc (P) Stock Is Too Unpredictable Ahead of Earnings](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
Although Pandora is down over 27% so far in 2017, it’s up over 35% from its sub-$7 lows made just six weeks ago.
First, The Rally in P Stock
Shares are up big since June because Sirius XM Holdings Inc. (NASDAQ:SIRI) made a $480 million investment in Pandora. In the deal, SIRI now holds about 19% of the outstanding stock and gains three board seats (including chairman). Additionally, at the end of June, CEO Tim Westergren announced his resignation.
In short, there have been several monumental changes at Pandora in just a few weeks. Change can be good, especially in a situation like Pandora. Although it has done a nice job growing revenues over the years, P stock has failed to generate meaningful net income. That’s a no-no in the stock world.
Additionally, companies like Spotify and Apple Inc. (NASDAQ:AAPL) have done a better job on the music front. Despite Apple’s deep pockets, Spotify has done well to fend off Apple and drive substantial user growth. In just 12 months, Spotify grew its paying subscriber numbers 66%, from 30 million to 50 million. Subscribers pay from $5 to $15 a month. The company has more than 100 million paying and free subscribers.
It has almost turned into a two-man battle between Apple and Spotify. That, I believe, is more of a problem for Pandora than its net losses. The company either needs to be profitable or boasting substantial user growth. Both would be great; neither is a disaster.
What This Means for Pandora Earnings
On Monday, analysts expect Pandora to report a loss of 24 cents per share, double its year-over-year losses. Revenue is forecast to grow 7.5% to $368.9 million.
But these expectations aren’t likely to be meaningful to P stock investors. They’ll want to know about subscriber numbers, guidance and ultimately, an update on what the heck is going on. With Sirius now having strong control over Pandora, investors may expect P to drop its paid subscription business.
While some may worry about the revenue impact, keep in mind Pandora still has tens of millions of subscribers who listen to ad-sponsored music for free.
New stakeholders, new management and new business models all equal new question marks. At the end of the day, I like to invest in sound businesses. All businesses go through their ups and downs, but P just has too many question marks around it right now.
I want to see free cash flow expand and cash flow from operations turn positive. I want to see gross profit regain traction and debt accumulation slow. Pandora was running desperately low on cash and SIRI’s nearly $500 million injection will help.
Put simply, Pandora wasn’t drowning, but it was definitely heading in that direction without intervention. But unlike Advanced Micro Devices, Inc. (NASDAQ:AMD) or BlackBerry Ltd (NASDAQ:BBRY), the underlying changes in the business aren’t occurring (yet).
They still have a ways to go and I can see why people don’t like BBRY and AMD, (even as some call the former the next Nvidia Corporation (NASDAQ:NVDA) and as the latter’s most recent earnings showed meaningful strides in improvement despite lacking profitability). But Pandora first needs to stop its decline, then focus on getting back to black. Then focus on profitability.
Trading P Stock
![P stock, Pandora, P, Pandora earnings](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
Click to Enlarge
Although I view the recent changes at Pandora as positive developments, I think investors should wait to see what’s going on in the business before getting long. Surely, Pandora is not one to short. First, many of the recent changes could very well turn out to be quite positive. Second, nearly 40% of the float is sold short.
At best, P stock is already a crowded short play. Additionally, even on mediocre news — no, even on “not devastating news” — P stock could rally meaningfully as shorts cover their bets. We don’t want to “bet” on a short covering taking place ahead of a big event. We’re investing, not gambling. Given the amount of changes at the company, it’s impossible to predict the outcome.
Wait for the earnings report, listen to the conference call and see how the stock’s reacting. For buyers, consider picking up P stock on a breakout over $10 or a pullback down to $8.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.