Should You Invest In Pandora?

With shares of Pandora (NYSE:P) trading around $14, is P an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Pandora is an Internet radio company that operates in the United States that has over 125 million registered users. Pandora’s Music Genome Project and its playlist generating algorithms predict listener music preferences, play music content suited to the tastes of each individual listener, and introduce listeners to music they will love. The main sources of revenue for the company are advertising as well as subscriptions. As the Internet music boom continues, Pandora is well-positioned to capitalize on potential subscriptions and advertising marketing share.

T = Technicals on the Stock Chart are Strong

Pandora stock saw a bit of selling pressure soon after its initial public offering which took the stock down to near $7 per share. The stock has not began a recovery and has doubled in just over six months. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Pandora is trading near its rising key averages which signal neutral to bullish price action in the near-term.

P

(Source: Thinkorswim)

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Taking a look at the implied volatility (red) and implied volatility skew levels of Pandora options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Pandora Options

61.43%

23%

21%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Pandora’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Pandora look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-11.11%

-69.72%

100%

80.33%

Revenue Growth (Y-O-Y)

59.07%

53.81%

59.99%

51.22%

Earnings Reaction

2.56%

8.29%

-17.28%

-5.26%

Pandora has seen mixed earnings and increasing revenue figures over the last four quarters. From these figures, the markets are becoming excited about Pandora’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Pandora stock done relative to its peers, Sirius XM Radio (NASDAQ:SIRI), CBS (NYSE:CBS), Cumulus Media (NASDAQ:CMLS), and sector?

Pandora

Sirius XM

CBS

Cumulus Media

Sector

Year-to-Date Return

56.54%

14.71%

26.18%

31.84%

28.45%

Pandora has been a relative performance leader, year-to-date.

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Conclusion

Pandora is an Internet radio company that attempts to predict listener preferences and find music they love. The stock is now recovering from selling pressure experienced since its initial public offering in 2011. Over the last four quarters, earnings have been mixed while revenue figures have increased, overall making investors in the company happy. Relative to its peers and sector, Pandora has been a year-to-date performance leader. Look for Pandora to OUTPERFORM.

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