This Just In: More Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Easy come, easy go ... easy come again
Four months ago, Pandora Media (NYSE: P) went public -- and promptly tanked. Lately, however, the stock has begun flirting again with its $16-a-share IPO price. For this, you can thank the friendly analysts at Barrington Research, who on Friday announced they're initiating coverage of the stock with a buy rating. Here's how StreetInsider.com described Barrington's endorsement:

"Pandora has created a nationally branded music programming service that has largely defined Internet Radio." It's got a "first mover advantage" and has captured a "dominant Share" of the mobile market, "with 70% of listening hours generated on mobile devices." Citing market researchers, Barrington notes that Pandora owns the No. 1 and No. 2 most popular apps on two of Apple's (Nasdaq: AAPL) most popular devices, the iPad and iPhone, and Pandora outsells a rival app from iHeartRadio. Nor is Pandora a slouch on competing platforms, either. It scores near the top of the charts on Google (Nasdaq: GOOG) Android devices and Research In Motion's (Nasdaq: RIMM) BlackBerrys as well.

This being the case, Barrington sees a bright future for Pandora, and predicts that "U.S. mobile ad revenue [will] advance significantly from its nascent stage, and ... Pandora is well positioned to be a leader." With "strong brand awareness and platform availability," Barrington expects Pandora to capture "a fair share of advertising and subscription revenue."

Let's go to the tape
Sound good so far? Sound familiar? It should. When the half-dozen or so bankers who underwrote Pandora's IPO issued their formal research reports on the stock back in July, they said many of the same things about Pandora. Pandora was "the category leader" (Wells Fargo). It was enjoying "strong growth in usage hours" (JPMorgan), and offered "an open-ended growth opportunity (Stifel Nicolaus). Oh -- and the stock would hit $25 within a year (Citigroup).

Of course, things so far aren't working out quite as well as planned. That price target for example, looks farther away from reality than it did even way back on IPO day. And yet, there are at least two good reasons to think Barrington might be right about Pandora: First and foremost, while the analysts named immediately above all underwrote the IPO, and had a vested interest in seeing Pandora succeed, Barrington ... didn't. Indeed, according to S&P Capital IQ, Barrington doesn't even own a significant stake in Pandora, and so is basically neutral in this debate.

Barrington's record, on the other hand, is anything but neutral. Indeed, in the race to pick winning media stocks, few analysts hold a candle to Barrington, which has earned a record of 69% accuracy in the media industry in general, and the subsector of radio stocks in particular:

So Barrington's a chart-topper, no doubt. But what about Pandora?

Pandora or Tantalus?
Fools, apologies for the head fake here, but impressed as I am with Barrington's record, I simply cannot back its play on Pandora. Why not? Because while I'm a fan of the service myself, and I agree with many of Barrington's arguments about the company's stellar revenue growth trend, that trend has been growing for years -- but still hasn't had any effect on profits.

Over the past five years, Pandora has grown its annual revenue stream by upwards of 14-fold. Down on the bottom line, though, the company's still losing money, and burning cash like mad. While the company's begun reporting positive operating cash flow, capex rates are rising, and eating it all up, with the result that free cash flow is nowhere in sight. Indeed, total GAAP losses for the past five years, and total cash burn, both exceed $60 million. Pandora has burned through more than $7 million in cash over the last 12 months, a worse result than it posted for all of last year.

The problem: Pandora may be growing advertising revenues and gaining share in the radio advertising market, but its growth still depends on widening its audience and getting more people to listen to more songs. But Pandora has to pay royalties on every song it plays -- so the more popular it gets, the higher its costs rise. It's a situation more reminiscent of Tantalus than Pandora. The more this company strains for revenue growth, the farther away the prospects for profits move.

Foolish takeaway
Pandora shares today are far cheaper than the $25 price target Citi set for it three months ago, and even cheaper than the company's IPO price. But at a share price nearly 12 times annual sales today -- and infinity-times its nonexistent profits -- Pandora is anything but a value trap. It's worse. It's a trap without value.

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