One of the difficulties of evaluating firms in the nascent stage of business growth is trying to figure out the role that share dilution will have on returns. That is one of the reasons why I have never covered Pandora as an investment. It is committed to having a debt-free balance sheet, and has also lost money every year it’s been publicly traded. That combination leads to heavy share dilution: Pandora had 163 million units in 2011, and now has 215 million pieces of ownership claims (i.e. shares of stock). If you’re a long-term shareholder of Pandora, the consequence of Pandora’s delayed onset of profitability is that each share of Pandora will perpetually earn 31.9% less than would be the case if Pandora had been profitable in 2011.
This fact isn’t a deal-breaker. If a company has the possibility of earning such lucrative future profits that the returns would be … Read the rest of this article!