Should You Take a Chance With Pandora?

With shares of Pandora (NYSE:P) trading around $28, 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 with 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.

Before the market open on Thursday, Pandora released Audience Metrics for the month of March that included better-than-expected listener hours. Listener hours were 1.71 billion, up sequentially from 1.51 billion last month and 1.49 billion last year. Our model forecast was 1.66 billion hours, so the figure exceeded our expectations. The sequential increase in hours, roughly 13 percent, outpaced the increase in the number of days in March versus February, roughly 11 percent, resulting in an uptick in share of total U.S. radio listening, which was 9.11 percent in March, up from 8.91 percent last month and 8.05 percent last year. Active listeners remained at 75.3 million for the second consecutive month, up from 69.5 million last year, but below our 78 million estimate. We expect listener hours to continue to rebound over the next several months as in-car integration increases. We also expect revenue per thousand listener hours (RPMs) to trend up as improving measurement techniques increase Pandora’s appeal among advertisers.

T = Technicals on the Stock Chart are Mixed

Pandora stock has been surging higher over the last several quarters. However, the stock is currently pulling back and may need time to consolidate. 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 between its rising key averages which signal neutral price action in the near-term.

P

Source: Thinkorswim

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

65.61%

96%

94%

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

Put IV Skew

Call IV Skew

May Options

Average

Average

June Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral 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 Mixed 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 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-200.00%

20.00%

1200.00%

-11.11%

Revenue Growth (Y-O-Y)

50.32%

50.28%

51.18%

59.07%

Earnings Reaction

-10.04%

-1.51%

-12.89%

-4.25%

Pandora has seen mixed earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have been pleased with 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 Radio

CBS

Cumulus Media

Sector

Year-to-Date Return

14.11%

-0.18%

22.83%

13.06%

7.31%

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

Conclusion

Pandora is an Internet radio company that attempts to match listeners with their preferences in order to discover music they love. The company on Thursday released Audience Metrics for the month of March that included better-than-expected listener hours. The stock has been rising higher over the last several quarters, but is currently pulling back. Over the last four quarters, earnings have been mixed while revenues have been rising, which has left investors pleased. Relative to its peers and sector, Pandora has been a year-to-date performance leader. Look for Pandora to continue to OUTPERFORM.

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