Thursday, September 12, 2013

Pandora (P) - All-time High Stock Price... Does MSFT Have a History of Competing Well Against AAPL?

P is trading $24.12, up 12.8% with IV30™ up 7.1%. The LIVEVOL® Pro Summary is below.

Pandora Media, Inc. (Pandora), is an Internet radio in the United States. As of January 31, 2012, it had over 125 million registered users.

This is a vol and stock note, in a name that has just broken an all-time high in stock price. Let's start with the news today, which is suspiciously benighn... or so I think:

Pandora surged after the Internet radio company named former Microsoft executive Brian McAndrews as its new chief executive officer, replacing Joe Kennedy.

Source: CNBC via Yahoo! Finance, written by JeeYeon Park

OK... Well, let's take a look at the two-year Charts Tab for P, below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see the stock pop today, pushing the price to what is actually an all-time high with a market cap of ~$3.75 billion. But if we take a slightly less myopic view and look at the stock chart for P over the last two-years (rather than just today) we can see a fairly dramatic price appreciation. In fact, the 52 wk low for P was $7.08, so it's up more than 200% in less than a year. The point? Simply that the new CEO news did push the stock to an all-time high, but the price had been appreciation quite abruptly even before this news.

What's interesting about P is that there have been a number of new entrants / competitors (like Spotify), but the real "scare" for P has been and continues to be the possibility that AAPL iTunes Radio will simply erase Pandora altogether. By "scare" I mean the most prevalent competitive news stories have written about Apple iTunes Radio in particular.  In fact, a NY Times article from just 22 hours ago reads the following:

Apple’s newest music feature, iTunes Radio, will be released on Sept. 18 as part of its iOS 7 system update, the company announced on Tuesday. The service is a sleek take on Internet radio, and Apple’s ability to place the app on millions of its devices gives it an enormous potential audience from Day 1.

“It’s a huge opportunity on a global basis to accelerate the transition of radio listeners and advertising dollars from terrestrial to digital,” said Stephen Bryan, the executive vice president for digital strategy at the Warner Music Group, which releases music by Green Day, Bruno Mars and hundreds of other acts.

The service is a threat to Pandora Media, which dominates Internet radio. But music and advertising executives say that the magnitude of that threat is unclear, given Apple’s relatively late entry into streaming music and Pandora’s strong market position. Both offer free streams of music tailored to a user’s taste and supported by advertising. In August, Pandora had 72.1 million active users — almost all in the United States — who streamed 1.35 billion hours of music, according to data released by the company.

“At this point Pandora is one of the leading recipients of mobile advertising revenue, and is one of the most popular apps, period, across devices,” said Clark Fredricksen, a vice president at eMarketer, a research firm. “It’s tough to see it getting killed.”

Source: NY Times, With iTunes Radio, Apple Takes Aim at Pandora


Given what has been happening with AAPL, it is interesting how little effect the new competitive landscape has had on Pandora. I just wrote a seminal article on AAPL (did I just call my own article seminal? Come on, let me have some fun) yesterday, which you can read by clicking on the title:

Apple (AAPL) - Part 7 (The End): This Just Isn't the Company it Used to Be... And it Never Will Be Again.

While I argue that AAPL's position as the number one technology innovator in the world has clearly been lost, I wouldn't all of a sudden assume they can't gobble up a company like Pandora with a better (or simply more easily distributed) product. I think the dismissal of the AAPL iTunes Radio product as reflected by Pandora's continued stock rise may be a bit... imprudent.

Let's turn to the volatility for P, there's a story to tell here as well. I've included the two-year IV30™ chart in isolation, below.

Two things are pretty easy to recognize:

(1) the peaks into earnings (the blue "E" icons represent an earnings date) are getting lower and lower.  it's not monotonic, but overall, it's undeniable.

(2) The overall level of the implied is simply lower.  This was a stock that traded in 130% range for IV30™ and now we're looking at ~56% after a market moving news event.

Both of these phenomena are natural as a firm moves from IPO stage to a more mature firm (in the public realm), but still... The stock is up more than 200% in something like nine-months and AAPL and a bunch of others are out there ready, willing and able to compete.

So... Why is P implied so low?  And... Why is the news of a MSFT exec becoming CEO such good news?  Does MSFT have a history of competing well against AAPL?

Finally, let's turn to the Options Tab for completeness.

Across the top we can see the monthly vols are priced to 55.39%, 55.55% and 59.74% for Sep, Oct and Dec, respectively.  That's fairly flat... or in English, this semi-depressed vol in P appears to be in a state of equilibrium... Hmm....

This is trade analysis, not a recommendation.

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