Is Pandora Well-Positioned for the Future?

With shares of Pandora (NYSE:P) trading around $27, 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.

Recording companies including Sony (NYSE:SNE), Comcast (NASDAQ:CMCSA)-owned Universal, Time Warner’s (NYSE:TWX) Warner Music, Capitol Records, and the independent label ABKCO filed a suit in New York State Supreme Court in Manhattan against the popular online radio service Pandora over recordings made before 1972, which aren’t protected under the same copyright laws as recordings made after that year. Federal copyright law doesn’t cover recordings made before 1972, though they are protected through various state laws. The record companies allege that it isn’t being properly compensated for the pre-1972 music they own. Pandora believes that those state laws adequately protect the music in question. “Pandora is confident in its legal position and looks forward to a quick resolution of this matter,” said a Pandora spokesman in a statement seen by Bloomberg Businessweek. This is only the latest in the online radio service’s battle to pay as little as possible in royalties for the music it offers.

“Pandora’s refusal to pay Plaintiffs for its use of [Pre-72] recordings is fundamentally unfair. Pandora’s conduct also is unfair to the recording artists and musicians whose performances are embodied in Pre-72 Recordings, but who do not get paid for Pandora’s exploitation of Pre-72 Recordings. It is also unfair to other businesses that compete with Pandora but obtain licenses and pay for the right to stream Plaintiffs’ Pre-72 Recordings to the public, while Pandora does not,” the suit reads. “As a result, Pandora deprives Plaintiffs and their artists of compensation, while profiting enormously from and gaining an unfair advantage over others who do pay to copy and publicly perform Plaintiffs’ Pre-72 Recordings.”

T = Technicals on the Stock Chart Are Mixed

Pandora stock has been pulling back in recent times. The stock is currently trading sideways and may need time to stabilize. 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

83.33%

92%

90%

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

5.41%

-9.31%

-5.96%

-13.10%

-4.74%

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. Recording companies including Sony, Comcast-owned Universal, Time Warner’s Warner Music, Capitol Records, and the independent label ABKCO filed a suit in New York State Supreme Court in Manhattan against Pandora over recordings made before 1972. The stock has been pulling back in recent times and is currently trading sideways. Over the last four quarters, earnings have been mixed while revenues have been rising, which has produced conflicting feelings among investors. Relative to its peers and sector, Pandora has been a year-to-date performance leader. WAIT AND SEE what Pandora does this quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

More From Wall St. Cheat Sheet: