Day in, day out, all week long, Things go better with rock
The only time I turn it down, Is when I’m sleepin’ it off
Turn up the radio, I need the music, gimme some more – “Turn Up the Radio” by Autograph
Back in the summer of 2012, I added a short position in both Dollar General and Dollar Tree. Both soon thereafter basically crashed in steady drip kind of way, and we suggested using our typical approach of taking some profits in the teeth of the decline. I later covered Dollar General and we’ve ridden the Dollar Tree right back up to about break even overall on the trade. Given that they’ve been just about breakeven in the last year or so since we used them as short hedges while the markets have been straight up and so have many of our long stocks, these “Short the dollar stores, not the dollar” hedges have served their risk-offsetting purpose well.
I’ve been vocally and overall very net long and very aggressively net long the “App Revolution” sector that I started highlighting back in 2010. The App Stock Bubble is here and in full swing and while I don’t want to try to catch a top in some of the most bubblicious stocks out there, app-related or not, such as Yelp, Zillow, or Tesla, I do think we’ve got a bubbled up App Revolution stock that we should now add as a new hedge to our portfolio. And that stock is, Pandora.
Now let me lay out the clearest risk here in this short — in a bubblicious market like this, especially because bubbles inflate high-growth company’s stock prices the most of all, Pandora can certainly continue to skyrocket. Current estimates for Pandora, which for the last couple years have continually been re-raised, are for the company to generate $800 million in sales in 2015 which would generate about 25 cents per share in earnings. That would mean the company would grow the topline about 50% per year for the next two years. The company’s been delivering that kind of growth for a few years in a row now, so it’s possible it keeps delivering that kind of growth.
But let’s look at the reasons for shorting it here. The stock has gone straight up for so long in this App Stock Bubble that it’s now trading at more than 100x those current 25 cents per share in earnings that the company might make in 2015 if they actually continue to grow their topline 50% per year.
Estimates haven’t moved much at all since Apple rolled out its new iTunes radio for iPhone, iPad and the iTunes program on your computer too. I expect that Apple’s iOS will soon be replacing the crappy interfaces and stodgy proprietary dashboard computers in high-end cars. I expect that at least a good chunk, maybe 10-20% of Pandora’s listeners will migrate over to the Apple iTunes radio this quarter and that won’t slow next quarter. Meanwhile, Spotify, which allows you to download and/or listen on demand to any major label’s songs, from your smartphone/tablet or computer, for less than $10 a month is also heating up here in the US where Pandora has reigned.
Somebody’s gonna find themselves chair-less when the music stops playing.
I’m going to add a Pandora short. If you use common stock, I might look to cover this thing if it pops above $30 in the near-term. I’m going to use some January puts with strikes prices around $22-24. I do think that the Pandora’s momentum-driven momentous stock rally is exhausting itself.
PS. Autograph was surely influenced in this, their only good song, by this great classic KISS song. This classic KISS video that goes with that great classic KISS song, on the other hand, not so great. How about Gene Simmons (whom I’ve met several times backstage and/or on my TV show where he intro’d my “Illuminati Alert” segment by saying into the camera “Wake up, KISS Army, it’s time for Cody Willard’s Illuminati Alert! Pay attention.” Man, that was cool, but I will tell you that he also literally charged even the camera crew and bartenders $5 for every autograph (no pun intended) he gave.