This Just In: More Upgrades and Downgrades

Before you go, we thought you'd like these...
Before you go close icon

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.

So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

Beware the reverse Jack-in-the-boxes
There's no two ways about it: Despite high hopes early on, 2011 has not been kind to IPOs. According to The Wall Street Journal and research house Dealogic, 63% of companies that went public so far this year are now selling below their initial public offering price. And since few investors actually get a chance to buy shares at the IPO price, it's worth pointing out that even more of these IPOs are selling below the prices they closed at on their first day of trading. Chinese software maker Qihoo 360 and U.S. job-networking site LinkedIn (NAS: LNKD) , for example, belong to the second group of companies. Meanwhile, the first category includes "China's Facebook," Renren (NAS: RENN) , "Russia's Google," Yandex, and ... America's Pandora Media (NYS: P) .

Not coincidentally, Pandora is the subject of today's column.

You had to look inside the box, didn't you?
Since IPO'ing on the NYSE at $16 on June 14, shares of Pandora Media have lost more than 35% of their value. That's bad news for early investors, but it gets worse: According to Wall Street analyst Dougherty & Co., the damage isn't done yet. Yesterday, Dougherty initiated coverage of Pandora with a "sell" rating.

According to StreetInsider.com, Dougherty has two main objections to Pandora. First, the company has to pay royalties on every song it plays -- so the more popular it gets, the higher its costs rise. Second, the company "faces a large and growing list of competitors." Dougherty singles out Spotify and Turntable.fm as key rivals. But really, that's just the start of the list. As the Fool's own Rick Munarriz pointed out back around the time of Pandora's IPO, the company also has to contend with:

  • Sirius XM Radio (NAS: SIRI) , the leader in "premium coast-to-coast content."
  • CBS' (NYS: CBS) Last.fm.
  • "the relaunch of AOL's (NYS: AOL) AOL Radio."
  • and iHeartRadio -- "one of music's more popular downloads on Apple's (NAS: AAPL) App Store since its 2008 rollout."

"Here's another nice mess you've gotten me into ..."
Granted, Dougherty's opinion is just one among many on Wall Street. Just a few weeks after Pandora appeared on the public markets, a whole host of other analysts ran to its defense. Wells Fargo, JPMorgan, Citigroup, William Blair -- they were all there, singing Pandora's praises and urging investors to buy the stock. Of course, it didn't prevent Pandora from falling.

Nor should it have, because even if the stock is cheaper today than it was a few months ago, Pandora's most recent numbers suggest that the lower stock price here may be a value trap. Pandora's burning cash. It's not profitable. Heck, even the bankers that helped bring this company public (the aforementioned Wells Fargo, JPMorgan, Citigroup, and William Blair) agree that Pandora isn't likely to earn a profit either this year or next year either.

Foolish final thought
Hopes currently hinge on the company's ability to somehow get back to black by 2014 or 2015. But is that really feasible? I mean, Pandora grew its revenues by more than 100% in the first half of 2011, true. But the effect of that wildfire revenue growth on Pandora's bottom line was to sextuple the amount of Pandora's net loss -- and wipe out last year's fiscal Q2 profit, turning it into a net loss in Q2 2011 as well. Unless that trend reverses -- somehow, some way -- Dougherty is right: Pandora is a "sell."

Disagree? Think Pandora has a future?Add it to your watchlistand see if you're right.

At the time this article was published Fool contributorRich Smithowns no shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 379 out of more than 180,000 members.The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of and creating a bull call spread position in Apple. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners