Vote Rhino 2012

P has earnings tomorrow, and LULU on Thursday. I’m short P and long LULU. Here’s a few points on why I think P misses. (I haven’t made the corrections yet)

1. Their business model is unsustainable and not profitable.
2. The high cost of royalty payments they make to the music industry is the greatest factor limiting their profitability.
3. As their active users and listening hours increase, so does their cost of revenue.
4. In their last quarter, from January 31st 2012 until July 31st 2012, their active users increased 15% and listening hours increased by 85% year-over-year; however, their cost of revenue increased by 9% to 60% of total revenue as a consequence.
5. Pandora is pursuing the passage of legislation – and is committing capital to achieving it –  that will lower the royalty payments it makes to artists, thus lowering its cost of revenue.  This legislation is called the “Internet Radio Fairness Act,” which at the current time has roughly a 4% probability of passing.[1]
6. The barrier to entry by companies with far more exposure is extremely low, and if the “Internet Radio Fairness Act” is passed, it would give incentive to companies like Google, Apple, and Microsoft to bundle their own internet radio with their smart phones, tablets, and other mobile devices.
7. Pandora made it possible for people to listen to their favorite music without having to physically have it saved on their devices; with the advent of the cloud, this is no longer relevant.
8. Companies such as Apple and Amazon already have cloud players where individuals are able to listen to music uploaded from their home computer on their mobile devices.
9. As of 11/6/12, Pandora has sued the American Society of Composers, Authors and Publishers (ASCAP), after over a year of  unsuccessful negotiations between the two, they have yet to reach a deal, with Pandora seeking “reasonable” licensing fees.
10. As of 11/14/12, 125 musicians, including Rhianna and Billy Joel, have signed an open letter to Pandora opposing the company’s drive to change how it pays royalties.
11. The company’s valuation is thoroughly flawed, not taking in to account the aforementioned headwinds. With EPS of $(0.20) before GAAP adjustments, it’s trading at $8.40; had earnings been $0.01, the stock would then be trading at 840x earnings, an unsustainable multiple.

Please refer to my previous posts for more LULU analysis. Here’s the short list; it tends to trade down into earnings, especially the morning of. I know, I am already long, but I am looking for a bounce tomorrow or early Wednesday morning. Then, after capitulation, I want to get back in toward the end of the day Wednesday. They almost always have EXTREMELY conservative guidance, and I’ve bought their outfits for my fiance the last three Christmases  and birthdays, she loves them, it’s all she wants to wear, same with her friends.

Put that in your pipe and smoke it. Short P long LULU.

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