Why Pandora’s Stock Wavers As Earnings Overshadowed With Deal Talk

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Pandora‘s recently reported Q2 fiscal 2016 earnings turned out marginally better than expectations, with non-GAAP diluted loss per share 4 cents better than the consensus estimate. However, revenue at $343 million, fell $7 million short of the consensus and total listener count dropped to 78.1 million from 79.4 million in Q1. Nevertheless, a marginal increase in active listener count was reassuring and the company deemed it a strong quarter.

However, the results were mixed enough to ellicit some investor concern. The stock was down in after-hours trading, though it opened up a scant 2% on news that Pandora had rejected a buyout offer from Sirius XM in recent months. A few months back, activist investor Corvex had started pushing Pandora’s management to consider a sale, arguing that it was the best way to provide strong returns to shareholders. The Internet radio company’s stock fell from $20 to $12 in October last year when it announced an adverse settlement on unpaid royalties.  And it has not recovered since, despite consecutive quarters of earnings outperformance.

Pandora’s progress has indeed been painfully slow.  It still seems far from generating profits and the recent mandated hike in royalty rates has only made things worse. Also, the company’s development of an on-demand music platform is certainly overdue as Rdio’s intellectual property, acquired last year for $75 million, still seems unused.

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Pandora’s current Market Cap is around $2.9 billion and we’ve estimated its value at $2.8 billion. The CEO of Liberty Media Corp, the owner of Pandora’s biggest rival Sirius XM, floated a buyout offer that valued Pandora at $3.4 billion. The Internet radio company refused the offer, believing to low relative to the company’s promise. (It commanded a market valuation of $4.6 billion last fall.) We believe that, given investors  agitatation with its slow progress, the company will have to somehow showcase a turnaround performance to revive their confidence.

However, there is a silver lining to this scenario. The rejection to the buyout offer is indicative of the fact that the management believes the company can manage current turmoil to offer shareholders stronger returns over time.

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