Thursday, April 28, 2016
I Love Pandora
By Dave Goodboy
Having trading and investing heroes is both inspiring and motivating. One of my financial heroes is Peter Lynch of Fidelity Investments. He is best known for managing the Magellan Fund from 1977 to 1990. During this time period, the fund returned an astounding average of 29% per year. This was truly a market-crushing
The primary take away I learned from Peter is a very simple concept. In fact, it’s so simple that many investors overlook the true power of the idea. The idea made popular by Peter Lynch is to invest in what you know.
This means to only invest in companies that you know, like and understand. The theory behind this idea is that if you like a particular brand, service, product and company others will also. This attracts buyers to the stock thereby pushing the stock price higher.
Using this idea is what led me to today’s stock pick, Pandora Media (NYSE:P).
I love all types of music from the blues to classical and ambient to heavy metal. Pandora has become my go to source for daily listening. The streaming music service has incredible depth and breadth of musical choice across all genres. Not only that, it builds custom listening experiences for the user based on the features inherent in artists and songs the listener plugs into the service.
It is truly amazing technology based on the Music Genome project that breaks music down to its basic DNA core to identify the exact qualities listeners enjoy.
The service boasts approximately 200 million registered users and over 76 million active listeners.
Perhaps the best part for users is that the service is completely free. Supported by advertising and a modest $3.99 monthly fee for those listeners who want an advertising free listening experience, the company boasts a market cap of $6.11 billion.
The other major metrics include annual revenue at nearly $734 million that has exploded higher in the last quarter by 68.8% year over year. Gross profit posts at $136 million and total cash on the books comes in at $341.3 million. YAHOO FINANCE
Other growth factors include advertising revenues ramping up 45% in the last quarter year over year to $141 million and subscription revenues accelerating by 192% over the same time frame to $54 million.
In addition, the unique metric ad revenue per thousand listener hours RPM increased by 50% year over year to $40.51.
What I like about the future of this company is the fact that it is focusing on local ad revenue by deploying a boots on the ground sales force in 37 markets with a goal of expanding to 239 local markets. This localization of advertisers, in other words targeting listener’s exact local area should work to dramatically increase the company’s bottom line.
In addition, Pandora is increasingly being integrated into the automobile industry as an in car entertainment choice. The company
has 5 million auto users currently. This number can only increase as these new cars go into the aftermarket, exposing another set of drivers to Pandora and the original owners purchase or lease their next new car with the service.
Perhaps most bullish of all is that Pandora’s management has forecasted revenue of $213 to $218 million in the current quarter. This reflects a revenue growth rate of over 32%.
Not to mention the fact that MKM Partners placed a $35 per share near term target and a $115 per share 5 year target on the company. In addition, Canaccord has a buy rating with a $43 target on the stock.
On the bearish side, the company still has a profit margin of negative 2.69%, negative 7.62 million EBITDA, and diluted EPS of negative $0.11.
In addition, competition such as Spotify, Amazon’s Prime Music, Google’s Play All, iheartradio, and Apple’s iTunes are all hot on the trail that Pandora pioneered.
I look at this as a possible extremely bullish scenario as one of the monster tech companies in the space may just make an offer than can’t be refused to buy out Pandora. Speculating a bit, this could create a bidding war easily pushing Pandora’s share price into the stratosphere.
With that said, the negative metrics should soon be rectified if Pandora remains on the present growth path. Combine this fact with the potential buy out possibility and it creates a compelling case to go long Pandora.
Posted by marketsurfer at 3:36 PM