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.
"Pandorum" at Pandora, Part 2
And they're off! Two weeks ago, I compared the business plan at Pandora Media (NYSE: P) to the 2009 cult classic Pandorum. The analogy isn't direct, but there are similarities.
In Pandorum, a plucky team of astronauts is pursued across a vast spaceship by mutant cannibalistic space colonists. At Pandora, a plucky team of Internet music pioneers is pursued by Sirius XM Radio (Nasdaq: SIRI), the leader in "premium coast-to-coast content"; CBS' (NYSE: CBS) Last.fm; a revived AOL (NYSE: AOL) Radio; and Apple's iHeartRadio app -- all of which want to eat Pandora Media alive.
Up until last week, most of Wall Street was rooting for the cannibals, but on Monday, the Space Cavalry came riding to the rescue. Yesterday, you see, was the day the "quiet period" for Pandora's several underwriters expired. Ungagged, the analysts immediately fired off volleys in support of their stock:
- William Blair: "Buy."
- Wells Fargo: "Pandora is a category leader" and has nothing to fear from the competition named above. Its "unique personalization technology ... is highly differentiated and is defensible against the competition."
- JPMorgan: Pandora is showing "very strong growth in usage hours," helping to "build significant market share." As for making money on that share, JP says it hopes Pandora will be able to "monetize mobile hours ... over the next few years and drop [some cash] down to the bottom line."
- Citigroup: If you take a discounted cash flow model with a 20% cost of capital, add a seven times multiple of Pandora's projected 2013 sales, then tack on 20 times projected 2015 EBITDA ... it all works out to a $25 price target.
Citi, by the way, is the most optimistic of the bunch. Most of its collaborators on the Pandora IPO price won't go farther than a low-20s price target. Indeed, even the more conservative analysts, such as Stifel Nicolaus and Morgan Stanley, argue Pandora's at least worth what investors are paying for it today. Why? Because according to Stifel: "Pandora represents an open-ended growth opportunity." It may look expensive, but it "deserves a valuation premium, which it has been awarded."
So you see, Pandora is actually perfectly priced today. Move along now. There's nothing more to see here.
Box closed. No peeking, please.
If only it were that easy. If only we could just take the opinions of six clearly conflicted analysts at face value, and accept their verdict that Pandora is at worst fairly valued today, and at best still wildly underpriced. But we can't -- not unless we want to lose money.
Because that's precisely what's going to happen to you if you invest in Pandora today.
Pandora: What's in the box?
Fools, in this world there are opinions and there are facts. You've just read the opinions of the folks who brought Pandora to market, and whose reputation as bankers depends on the IPO remaining a success. Now let me remind you of the facts:
Fact: After losing money and burning cash for years, Pandora managed to get itself looking free cash flow positive just in time for its IPO last month. But now that that pesky little detail is out of the way, the company's already lapsing back into bad habits. It lost $5.5 million over the last 12 months. No one expects it to make a profit this year, or next year either.
Fact: Despite positive free cash in the latest quarter, Pandora has been burning cash over the last year. Free cash flow ran to -$9 million, nearly twice as bad as the reported GAAP loss, and Pandora's worst showing since fiscal 2009.
Fact: Spotify just showed up to reinforce the ranks of Pandora's rivals -- so the competitive environment is getting worse instead of better.
Foolish takeaway
I said it before and I'll say it again: "Unprofitable and burning cash, I don't see much reason to own Pandora." Seek your profits elsewhere.
