Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Down 55% over the past 52 weeks, Pandora Media (NYSE:P) stock is hopping this morning, boosted by a positive analyst note out of BMO Capital Markets. This is, needless to say, a nice surprise for Pandora shareholders, who saw their stock trashed 22% earlier in the month after Pandora's surprise earnings miss. But is the pop real? Can it last?
Here are three things you need to know.
1. What popped Pandora's bubble
Let's get the bad news out of the way first: Things are not going well for Pandora. The streaming music company reported earnings two weeks ago. Sales were up 8%, and the company's GAAP net loss contracted to $0.27 per share. Still, both active listeners and total listener hours declined by about 5% year over year, and Pandora management complained of "difficult market conditions" preventing it from earning a profit.
Pandora missed analyst targets for sales growth. Worse, management warned that sales for the current fiscal fourth quarter will miss analyst targets badly. Wall Street is looking for Pandora to generate sales of $413 million -- a modest target implying only 5% sales growth. Nevertheless, Pandora is promising no more than $380 million in revenue for the fourth quarter, perhaps as little as $365 million, and thus is on track to both miss analyst targets and show a big decline in sales year over year.
2. What BMO said about that
So the news is not great, and acknowledging that, BMO says it "sees limited ... catalysts" for Pandora improving its business in the near term. And yet, TheFly.com reports that BMO is nonetheless optimistic about the future for Pandora stock. According to the analyst, "channel checks on audio ads" have been "positive" recently, and Pandora's subscriber business is doing better than expected. The company is reaping higher gross margins on non-music content (i.e., podcasts). In the analyst's view, investors who sold off Pandora stock earlier this month simply fail to "appreciate" these factors favoring Pandora's business.
3. Pandora by the numbers
But how much appreciation does Pandora stock really deserve? Reviewing the company's financials on S&P Global Market Intelligence, I see strong sales growth is Pandora's primary selling point, with sales up more than triple over the past five years. The problem is, that the more Pandora sells, the more money it seems to lose.
Over these same past five years, net losses at Pandora have swelled 20-fold, to a recent trailing-12-month loss of $564 million. Pandora's cash burn rate isn't quite as terrible, with the company burning through $247 million over the past year. But even so, at its current burn rate, Pandora will be out of cash in just two years -- making this sort of a race against time. How long can Pandora continue on without "near-term catalysts" before it runs out of cash?
Hope from a white knight?
Which brings us to Sirius XM (NASDAQ:SIRI), and what I suspect is BMO's real cause for optimism.
Two months ago, Pandora announced that satellite radio pioneer Sirius XM had completed its $480 million "strategic investment" in Pandora, buying a boatload of Series A preferred stock that is convertible into Pandora common stock at the rate of $10.50 per share.
But here's the thing: Pandora stock currently costs less than half that conversion price, which to me suggests that Sirius is unlikely to convert its preferred shares into common anytime soon. What's more, as a condition of the investment, Sirius agreed not to buy any more Pandora stock for 18 months (a restriction that still has more than a year to run), nor to acquire more than 31.5% of Pandora subsequently.
These restrictions would seem to tie Sirius's hands should it attempt to gain control over Pandora in the immediate future. Then again, given how bad things look for Pandora today, maybe BMO's thinking is that Pandora might be willing to waive the restrictions and accept its white knight with open arms.
If that's the only way to save the company, BMO just might be right.