Where Will Pandora Go Next?

With shares of Pandora (NYSE:P) trading around $13, is P an OUTPERFORM, WAIT AND SEE or STAY AWAY? Lets analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Pandorais an Internet radio in the United States. As of January 31, 2012, it had over 125 million registered users. The 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. It also offers a subscription service to listeners and provides service through two models: Free Service and Pandora One.Most of the revenue is generated from the subscription service and advertising. As consumers in the United States search for improved methods of entertainment, Pandora is able to provide an audio outlet that will continue to be highly demanded.

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T = Technicals on the Stock Chart are Strong

Pandora stock saw a significant decline from its initial public offering price but has began to recover. Recently, the stock has broken above a multi-year downtrend which may be an indicator of higher stock prices in the future. 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 above its rising key averages which signal neutral to bullish 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

54.3%

73%

74%

What does this mean? This means that investors or traders are buying a 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 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 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?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-119.57%

100%

25%

80.33%

Revenue Growth (Y-O-Y)

53.81%

59.98%

51.22%

58.27%

Earnings Reaction

17.56%

-17.46%

14.28%

12.29%

Pandora has generally seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have been mostly excited with Pandora’s recent earnings announcements.

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P = Excellent Relative Performance Versus Peers and Sector

How has Pandora stock done relative to its peers, Sirius XM (NASDAQ:SIRI), CBS (NYSE:CBS), Google (NASDAQ:GOOG), and sector?

Pandora

Sirius XM

CBS

Google

Sector

Year-to-Date Return

43.03%

3.63%

18.71%

8.69%

16.36%

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

Conclusion

Pandora provides audio entertainment services to a growing audience in the United States. The stock seems to be gaining ground after its last couple of dismal years. Currently, Pandora stock is supported by a strong short-term uptrend fueled by better than expected earnings and revenue figures in recent quarters. Relative to its peers and sector, Pandora has led in year-to-date performance by a wide margin. Look for Pandora to continue to OUTPERFORM.

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