Pandora Sells More Shares -- Don't Be a Buyer!

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The news of Larry Summers' withdrawal from consideration as Fed chairman was probably instrumental in driving stocks higher today. The S&P 500 (SNPINDEX: ^GSPC  ) picked up 0.6% to close just seven-tenths of a percentage point below its August 2 all-time (nominal) high. The narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) rose 0.8% and is now within 1% of its all-time high (also set on August 2).

Despite these gains, the CBOE Volatility Index (VOLATILITYINDICES: ^VIX  ) rose 1.6% today, to close at 14.38 -- the VIX, Wall Street's "fear index," is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming 30 days. The increase may reflect investors' uncertainty concerning the outcome of the Fed's two-day policy meeting, which begins tomorrow. The market expects the Fed to announce that it will begin scaling back its monthly bond purchases, but the details of the "taper" -- even assuming that is the outcome of the meeting -- are fodder for some guessing games.

Either way, I'm not surprised to see the VIX rise today, as 14 really looks like a floor for the VIX in the current environment. There are more than enough risk factors that could provoke a bout of volatility over the next 30 days: Take your pick among Syria, the German elections, or pitched battles over the U.S. budget/ debt ceiling, to name just three of the most prominent.

The ducks are quacking for hot technology issues!
Less than two weeks ago, professional social networking platform LinkedIn (NYSE: LNKD  ) announced a billion-dollar-plus secondary share offering. Last week, Twitter announced it had filed for an initial public offering.

Sensing the moment is opportune, Pandora Media (NYSE: P  ) filed today for a secondary stock offering of its own. The Internet radio service will sell up to 12.1 million shares, which would raise the share count by approximately 7%, and expects to raise up to $279.4 million.

At 143 times the estimate of the next 12 months' earnings per share, per S&P Capital IQ, LinkedIn's shares look awfully expensive, but the business is solidly profitable, its earnings are protected by a competitive moat, and its growth prospects are good (maybe even excellent).

At 154 times, Pandora is even more expensive, but it hasn't had a profitable year, on a GAAP basis, in at least six years. Sure, the Wall Street consensus has the company achieving profitability in fiscal 2015, but the truth is that, for a business like this, analysts have little to no confidence regarding the magnitude or even the direction of their estimates.

Don't take my word for it, though. Take a look at the 28 pages of risk factors the company lists in its filing, the first two of which are:

Internet radio is an emerging market, which makes it difficult to evaluate our current business and future prospects.

We have incurred significant operating losses in the past and may not be able to generate sufficient revenue to be profitable.

Would you like an example of the sort of uncertainty Pandora faces? Consider, for instance, that technology juggernaut Apple is launching iRadio along with iOS 7, which has the potential to gravely harm Pandora's franchise. In order to buy the stock at its current price, an investor needs strong conviction that the company can walk through a minefield unscathed. I can't begin to imagine how one acquires that kind of conviction.

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  • Report this Comment On September 16, 2013, at 11:11 PM, Medicalrecordman wrote:

    As if the dilutive secondary wasn't bad enough, what's even worse is the profit warning on slowing sales. I think any participant in the offering is absolutely nuts if it's priced over $21.00

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