Analyst Questions The Logic Of Sirius XM Pursuing Pandora

Rich Tullo of Albert Fried questioned the logic behind the potential Sirius XM Holdings Inc. (NASDAQ: SIRI) acquisition price for Pandora Media Inc (NYSE: P), questioning whether a subscription business makes sense when Sirius Satellite radio itself is successful with 25 million paid subscribers at lower subscriber acquisition costs.

“Pandora’s core free platform is attractive in our view but much like Twitter, user growth has flattened and we think the multiple in the M&A market may not be attractive given the current valuation,” Tullo wrote in a note.

The analyst also questioned Pandora One’s value proposition and IoT integration long term. Pandora plans to migrate users to a roughly $10 a month subscription, but with integrated IoT offerings from Amazon.com, Inc. (NASDAQ: AMZN) and Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGL).

“We question, in a proprietary delivery system IoT environment whether can Pandora maintain its market share free or otherwise? No doubt Pandora needs to be sold in our view but is Pandora worth $4.4 billion to any buyer?” Tullo questioned.

The analyst believes there is a 60 percent probability that Pandora is not sold with a premium in the near term and thinks 40 percent probability that a deal is a take under relative to recent $13.79 per share close.

“We forecast Pandora will trade to below our $8 target if Pandora is a busted deal stock,” Tullo added.

What's An Investor To Do?

Against this backdrop, Tullo recommends Pandora shareholders should take profits. The analyst said it is unlikely that the Underweight-rated Pandora to fetch a premium price. In addition, shares have about 23 percent to 42 percent downside risk and maybe more if the cash burn accelerates owing to a failed subscription model.

At Last Check

• Pandora shares were down 0.36 percent at $13.79.
• Sirius XM shares were up 0.88 percent at $4.58.