Must-know: Why the shorts had Pandora wrong

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Must-know: Why the shorts had Pandora wrong PART 1 OF 6

Why has Pandora’s stock been a roller coaster this past year?

Dramatic 52-week range

Pandora has had a tumultuous run over the course of the past year. The Internet streaming radio service possesses a dramatic 52-week high-low range of $31.94 to $7.75. Today, trading at nearly $28, the stock is up over 260% off its December 2012 low. Around the time of the stock’s trough, many high-profile investors and hedge funds took short positions in the company’s shares. This series will examine the investment case for Pandora, which is a member of the Global X Social Media Index ETF (SOCL), which seeks to provide exposure to an index of social media stocks.

Why has Pandora’s stock been a roller coaster this past year?

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Music Genome Project

Pandora, founded in 2000, made waves in the music industry when it debuted with its innovative platform for streaming music to listeners. The company developed a proprietary database of songs dubbed “the Music Genome Project,” or MGP, which ascribed roughly 400 different attributes to every song. The database allowed users to create “channels” where songs with similar attributes would play in a continuous stream. The database, which has now surpassed the 1 million song mark, initially served as a significant barrier to entry to potential competition and allowed Pandora to develop an important first-mover advantage.

Pandora monetizes its user base and generates revenue through display advertisements like banners, audio advertisements that are occasionally broadcast between songs, and subscription fees for users that desire the service without ads. The service’s success in providing users with an enjoyable listening experience allowed the company to grow revenues from $55 million in fiscal 2010 to nearly $430 million in fiscal 2013, a 680% increase over that timeframe. Pandora went public in June 2011 with an IPO price of $16 and quickly rose above $20. However, just as quickly, the stock fell below the IPO price and languished there as skeptical investors questioned the future of the company.

In the next segment of this series, we’ll tackle the bear case for Pandora.

Correction: When this article was originally published on December 10, it incorrectly claimed that Blue Ridge Capital had been short on Pandora. However, Blue Ridge Capital had been short on Pandora DC (the jewelry maker), and this article was corrected on December 11 .


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