Pandora (P) shows signs of strong growth potential and is making the rounds in an effort to tell its story. The stock is a Zacks #2 Rank (Buy).
Company Description
Pandora operates as an Internet radio company in the United States. It provides its radio service to traditional computers, Android phones, Blackberry phones, and the iPhone. The company allows listeners to seed personalized stations with artists, composers, songs, and genres or choose stations organized by genre.
Limited Operating History
Pandora completed its initial public offering on June 15, 2011 and has reported earnings only two times. The first report of breakeven was in line with the Zacks Consensus Estimate. The next report was also breakeven but ahead of the Zacks Consensus Estimate of a loss of $0.01.
Early investors will look more closely at sales growth for young company’s like Pandora. IN each of its two reported quarters, the company has beat on the topline. The Zacks Consensus Estimate for sales in the October 2011 quarter stands at $83 million.
Competition Abounds
Recently a competitor that has nearly 10x the revenue that Pandora has reported revenues that were slightly below expectations. Other competitors like Spotify are not public, which make valuations for the industry somewhat difficult. Streaming media companies like Last.fm and Turntable.fm are also in the mix and provide similar services.
Making the Rounds
A good sign of management confidence is that they attend nearly every investor conference. This seems like a non factor to most, but given that management has to get the story out, these conferences are all opportunities that they do not pass up on. I view this as a sign of confidence
One of the key ideas that these conferences revolve around is the idea of the need for a local sales force for P. The company is competing on a national and local level and it has resisted the need to fill out a full feet on the street strategy. Limited sales hires seem to be more prudent and help contain costs.
Valuations
The valuation for P is a tough thing to get your arms around. Its limited operating history and nascent market provide many challenges. For the foreseeable future, investors can expect PE ratio’s to be in the 1,000’s or at least in the high hundreds range. Focusing on ratings for the near term is probably one of the best ways to measure the potential growth of the company. With very limited penetration, a small increase can have a big impact on the financial health of the company.
The Chart
The recent price action shows some pretty big swings of late. With earnings expected to be released in the coming weeks, another leg up can be expected if the company beats expectations and guides Wall Street with a postive outlook for 2012. That would be music to the ears of aggressive growth investors.
Brian Bolan is an Aggressive Growth Stock Strategist for Zacks.com.
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