• Research

Dec 7, 2016

S3 BLACKLIGHT: Short Sellers Turn Up the Volume on Pandora Media Inc.

Digital music streaming service provider Pandora Media Inc.’s (P US) price is $13.93/share up $3.51, or 34%, from its recent low on November 10th of $10.41/share. Pandora’s price started to move up after several analyst upgrades with target prices between $16-$18/share.

The analysts set upbeat price targets even though Pandora’s yearly growth is slowing. Active listeners are down slightly year over year and although online advertising increased through the first three quarters of this year, customer subscription revenue was down. Pandora is trying to offset its decline in its existing subscription revenues with the introduction of on-demand Pandora Premium. Pandora is hoping the transition of existing Pandora Plus users and 100,000 of new subscription users per year will boost revenues back to its early growth levels.

But the most obvious reason for Pandora’s recent run-up are the recent rumors that Sirius XM Holdings (SIRI US) approached Pandora as a potential acquisition target for the second time this year. Sirius XM’s initial $15/share offer was rejected by Pandora in the early summer. This time may be different as many of Pandora’s shareholders see a sale as the only way to unlock shareholder value especially with competition from Apple (AAPL US), Spotify and Amazon (AMZN US) making subscriber retention and acquisition more difficult and costly. A potential offer from Sirius may push Pandora’s stock price to the high side of its target range with a 30% buyout premium raising Pandora’s stock price near $18/share.

Short sellers, however, are not convinced that either a Sirius buyout is likely or Pandora can reinvigorate its revenue growth rate. Pandora short interest topped $1 billion for the first time this week, rising to $1.08 billion as of today. The last time we saw Pandora’s short interest near these levels was in November of 2013 when short interest hit $900 million after the introduction of Apple’s ITunes and its success in acquiring 11 million active users in just 5 days. Pandora’s short interest is up $550 million, or 104%, for the year with all of that growth happening since the end of October, most of it in December. Short interest still has room to grow and there is still ample stock borrow supply to support short selling but cost is starting to increase. New stock borrows are no longer at General Collateral levels but are trading between 5/8% fee to 1.00% fee.

If the possibility of a Sirius acquisition increases and Pandora’s stock price continues to climb there will be an exodus of short sellers to prop up Pandora’s stock price even more. With today’s short interest double Pandora’s two year average if a short squeeze occurs we could see upwards of 40 million shares bought to cover just to get to previous historical levels – or five times recent daily average trading volumes.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.


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