Why Pandora Shares Are Sinking

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Pandora Media Inc. (NYSE: P) saw some quite a bit of action from analysts to kick off the week. This is all following a recent deal that the online streamer inked with Sirius XM Holdings Inc. (NASDAQ: SIRI). Some of the analysts were encouraged by the renewed core focus and profitability, even if they dislike convertible stock financing, while others were largely negative.

The company is in a situation in which short sellers were betting hard against a deal happening. Pandora’s short interest was 78.48 million shares on May 31, up from 67.12 million shares on May 15. That 17% gain in the short interest took it to a total of 33.7% of Pandora’s entire float, and it was seven days to cover.

Oppenheimer was one of the bears. The firm downgraded Pandora from Outperform to Perform and removed its $14 price target, which compared with an $8.52 prior closing price.

Following a conversation with management, Oppenheimer believes capital from the Sirius and Ticketfly transactions will allow Pandora to refocus its efforts on the core advertising business. This is the correct strategy, in the firm’s view, for several reasons:

  • Competitors are less sophisticated than in premium-subscription area.
  • Digital audio ads remain under-monetized.
  • Core radio product leverages P’s competitive advantage (song-matching), better than premium subscriptions.

Wedbush detailed in its report:

We are encouraged by Pandora’s renewed focus on its core value proposition and profitability. We expect subscriptions to grow and contribute meaningful leverage and profitability upon achieving sufficient mass, while the new financing from SiriusXM and a cleaner balance sheet should allow the company to invest in marketing without raising additional capital. … Although we generally dislike convertible stock, Pandora included a potentially favorable redemption option. It can redeem the preferred stock at any time after three years if its daily volume-weighted average stock price is greater than or equal to 175% of the then applicable conversion price (roughly $18.38 plus accrued and unpaid dividends) for at least 20 days during a 30 day trading window prior to the notice of redemption. Pandora is required to redeem after five years at its liquidation preference plus all accrued and unpaid dividends… The potential inclusion of Pandora in its product offerings should allow SiriusXM to provide a more interactive experience to its over 30 million subscribers.

Credit Suisse said:

We decrease our price target to $11 as we account for the total cash inflow of $608 million on the following factors: Ticketfly Sale to Eventbrite for $150 million in cash + $50 million in notes receivable, $480mm in investment from SiriusXM, less $22.5 million in termination fees to KKR – offset by an increased diluted shares outstanding as well as anticipated cash dividend payments. Concurrent with the announcement, Pandora also reiterated its 2Q17 and FY17 guidance for the full year prior to any adjustments for Ticketfly. Second quarter revenue is expected to be between $360 million – $375 million and Adj. EBITDA loss is ($65)-($50) million. FY17 revenue is expected to be in the range of $1.5 – $1.65b. Given the timing of the Ticketfly sale is 3Q17, we have eliminated its contribution in our model starting in 4Q17. Upon close of the transaction, SiriusXM will receive three seats on the Pandora Board. Given the prior move to extend the timing of the investment from KKR as well as the interest from Liberty previously widely reported in the media, we do not believe this development is a surprise and for the time being, it does look like the board will consent to watching the development of the Premium subscription business as it has launched already.

Shares of Pandora were last seen down 4% at $8.15 on Monday, with a consensus analyst price target of $12.93 and a 52-week range of $8.14 to $14.98.