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Should Investors Be Happy About Pandora Media Inc’s (NYSE:P) Cash Levels?

Two important questions to ask before you buy Pandora Media Inc (NYSE:P) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the internet software and services industry, P is currently valued at US$2.55b. I will take you through P’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.

Check out our latest analysis for Pandora Media

What is Pandora Media’s cash yield?

Free cash flow (FCF) is the amount of cash Pandora Media has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.

The two ways to assess whether Pandora Media’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.

Free Cash Flow = Operating Cash Flows – Net Capital Expenditure

Free Cash Flow Yield = Free Cash Flow / Enterprise Value

where Enterprise Value = Market Capitalisation + Net Debt

Although, Pandora Media generate sufficient cash from its operational activities, its FCF yield of 6.84% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.

NYSE:P Net Worth September 18th 18
NYSE:P Net Worth September 18th 18

What’s the cash flow outlook for Pandora Media?

Does P’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next couple of years, expected growth for P’s operating cash is negative, with operating cash flows expected to decline from its current level of -US$105.8m. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. However, breaking down growth into a year on year basis, P ‘s negative growth rate improves each year, from -39.8% in the upcoming year, to 240% by the end of the third year.

Next Steps:

The yield you receive on Pandora Media is in-line with that of holding the broader market index. But holding the stock on its own is riskier than investing in the diversified market, which means the yield is not that attractive on a risk-return basis. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Pandora Media to get a better picture of the company by looking at:

  1. Valuation: What is P worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether P is currently mispriced by the market.

  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Pandora Media’s board and the CEO’s back ground.

  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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