1-Star Stocks Poised to Plunge: Pandora?

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Based on the aggregated intelligence of 170,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, online radio company Pandora Media (NYSE: P  ) has received the dreaded one-star ranking.

With that in mind, let's take a closer look at Pandora's business and see what CAPS investors are saying about the stock right now.

Pandora facts

Headquarters (Founded) Oakland, Calif. (2000)
Market Cap $2.14 billion
Industry Broadcasting
Trailing-12-Month Revenue $167.2 million
Management Chairman/CEO Joseph Kennedy
CFO Steven Cakebread
Trailing-12-Month Operating Margin (1.6%)
Cash/Debt $43.7 million / $7.4 million

Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.

On CAPS, 80% of the 248 members who have rated Pandora believe the stock will underperform the S&P 500 going forward. These bears include All-Stars TMFBreakerJava and TheMiracleDJR, both of whom are ranked in the top 10% of our community.

Just last week, TMFBreakerJava touched on the stock's seemingly unsustainable valuation: "Buying this IPO requires that you believe that Pandora will continue to grow like crazy, establish a moat based on network effects and fend off significant competitors. It might happen, but investors are taking a lot on faith."

In fact, Pandora currently trades at a lofty price-to-sales ratio of 11.8. That represents a clear premium to gorilla music-streaming threats like Sirius XM Radio (Nasdaq: SIRI  ) (4.3), Apple (Nasdaq: AAPL  ) (3.4), and Google (Nasdaq: GOOG  ) (5.1).

CAPS All-Star TheMiracleDJR elaborates on the Pandora bear case:

Beyond laughable. Cool, well intentioned company, but who the **** has time to sit and listen to songs all day long hoping to find one decent one. I also think songs have an emotional intensity as well as a specific style and I'm not sure that just because two songs each have a flute or similar bass-line that they are all that similar. I think this is an utter disaster as a public company and that it won't exist 5 years from now as one.

What do you think about Pandora, or any other stock for that matter? If you want to retire rich, you need to protect your portfolio from any undue risk. Staying away from dangerous stocks is crucial to securing your financial future, and on Motley Fool CAPS, thousands of investors are working every day to flag them. CAPS is 100% free, so get started!  

Motley Fool newsletter services have recommended buying shares of Google and Apple and creating a bull call spread position in Apple. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always gets a perfect score.

Read/Post Comments (8) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 20, 2011, at 10:41 AM, bottomfisherman wrote:

    Its garbage and should have started as a penny stock which it will soon be anyways.

  • Report this Comment On June 20, 2011, at 10:48 AM, mapbc wrote:

    More people than ever using smart phones...streaming music isn't going anywhere. They have a system that creates a unique experience for the user and exposes them to new media.

    It's a nice service. I don't know how to value it as a stock at this point though so I will wait and watch until I have more info.

  • Report this Comment On June 20, 2011, at 11:02 AM, deathinacan66 wrote:

    As with other tech stocks, I listen to those around me who actually use Pandora to come to my conclusion.

    The service can be influenced enough to the point to where you as the end user can customize your stations, your song preferences, etc.

    Pandora would excel as the new "mtv" of the modern generation, if they would do 2 things -

    1 - Allow user uploaded music (not much unlike the Beta version of Google's cloud based music player)

    2 - Have a music video option for those that have a higher bandwidth (also opening doors to full video commercial advertisements)

    ... There is plenty of potential here, however there are shortcomings that are voiced across the net that can't be ignored.

    It seems the business model that Pandora has created for itself is trapping the company in their own box.

  • Report this Comment On June 20, 2011, at 12:30 PM, waterinfo wrote:

    A regular radio station has an FCC licensed channel, and has no further cost for delivery of its programming (beyond maintenance and electricity for its transmitter).

    SiriusXM has FCC licensed channels, government approved orbital slots, and has paid for satellites to provide the delivery mechanism for its programming. The costs, mostly sunk costs at this point, are known, predictable, and are essentially independent of the number of users. The company has complete control of its own delivery mechanism.

    Internet radio, as a separate service, like Pandora, is totally, TOTALLY, TOTALLY dependent upon a third party for delivery of its product. The Pandora customer must ALSO be a customer of a wireless internet service, with its own profit motive, and the Pandora customer is paying for that service many times more than the SiriusXM monthly cost.

    Moreover, the cost of the delivery mechanism, being far more than the cost of the content (which allegedly is free), is very likely to become totally volume dependent over the next year or two, especially for high volume users like radio listeners. this will result in an effective hourly cost to listen to "free radio" of somewhere, according to my calculations between 7 cents and 50 cents per hour, possibly much more in some scenarios. Home much money would Dominos make if the delivery cost of its $10 pizza were $100. In addition, the delivery mechanism for Internet radio from a fidelity, quality, and coverage perspective is far inferior to direct broadcast satellite.

    Pandora and its brethren are the bust companies of our current era. There were hundreds of such companies founded in the mid-to-late 1990's that raised millions and billions in IPO capital and promptly flushed it down the toilet. Pandora will join them.

  • Report this Comment On June 20, 2011, at 2:04 PM, motleymarty wrote:

    waterinfo, what would SIRI holders do without your well reasoned, informative posts?

    As usual, some people still cannot see the forest for the trees.

  • Report this Comment On June 21, 2011, at 8:41 AM, RealSmart11 wrote:

    I would have to argue that some of the comments left on here are incorrect, for example the person saying pandora wont be here in 5 years, I started listening to pandora 5 years ago and all it has done was grown, what makes you believe that it wont last another 5 years, the first 3 years are the hardest. Congrats to the person who realizes that as more people use their smart phones they will utilize streaming music websites/apps EX. Pandora. heck, on the Blackberry Pandora comes pre-loaded on the system. Who knows is Pandora will be bought out by a larger company but all that will do is help the stock. Ignorance is Bliss

  • Report this Comment On June 21, 2011, at 8:41 AM, RealSmart11 wrote:


  • Report this Comment On June 21, 2011, at 4:16 PM, marqs wrote:

    I would separate two issues, the product and its ability to make a profit.

    From a product standpoint, they have 30MM unique restrations, which to me demonstrates that the product has traction. Furthermore, the type of people who use this platform are not just looking for their "favorite songs" they're looking to get exposed to new songs/bands that would interest them. So the argument "who the **** has time to sit and listen to songs all day long hoping to find one decent one" is a total non-starter.

    The problem, as with most .com start-ups is figuring-out how to turn a profit. If I had the answer to this one, I would be rich man.

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