Can Pandora’s Stock Rebound?

With shares of Pandora (NYSE:P) trading around $25, 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.

Pandora delivered its second straight beat and raise. Q2 revenue exceeded the high-end of the guidance range by $1 million, and the full year range was increased by a bullish $15 million. In addition, after delivering a $0.01 EPS beat in Q2 at the high-end of the guidance range, the full year guidance range was increased by $0.01 – 0.02. The beat and raise sent a positive signal to investors that EPS growth is a key goal as Pandora scales its business. In the past, management typically maintained FY guidance and invested EPS upside back into the business. June audience metrics were down month-over-month, accentuating investor concerns about slowing growth, and causing share price weakness in the aftermarket. June listener hours were down 7 percent month-over-month to 1.61 billion. Listener hours per day were 53.7 million in June, down from 55.8 million in May. In addition, share of U.S. radio listening was down to 8.90 percent in June from 9.13 percent in May, and active listeners were down to 76.4 million in June from 77.0 million in May. Management attributed the declines to seasonality; however, it appears some investors believed that the declines were the result of increasing competition, resulting in Pandora shares trading down after the market close. Pandora continues to show signs of operating leverage in its model. Once again, revenue per thousand listener hours grew at a faster rate than licensing per thousand listener hours.

T = Technicals on the Stock Chart Are Weak

Pandora stock has struggled to make significant progress. The stock is currently pulling back and may need time to stabilize before heading higher. 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 below its rising key averages which signal neutral to bearish 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

53.39%

40%

38%

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

August Options

Steep

Average

September Options

Steep

Average

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

2014 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

-62.50%

64.32%

-200.00%

20.00%

Revenue Growth (Y-O-Y)

74.40%

55.34%

50.32%

50.28%

Earnings Reaction

-11.75%*

-16.63%

-10.04%

-1.51%

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.

* As of this writing

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

7.96%

-1.14%

-8.21%

-27.55%

-6.23%

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 stock has struggled to make significant progress and 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. WAIT AND SEE what Pandora does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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