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Pandora Stock Hitting All the Right Notes

Pandora (P) priced its 2011 IPO at $16 a share and, after a brief pop to $20, saw shares steadily slide down to about $7 late last year.

But that’s ancient history with the stock touching $20 again in early June, and doubling since Jan. 1.

Plus, there’s reason to think Pandora stock will keep hitting all the right notes going forward, despite its red-hot run.

Pandora earnings in May handily topped Wall Street expectations with better-than-expected revenue and losses in line with projections. Yes, the company remains in the red and isn’t forecast to turn a profit until fiscal 2015, but subscribers more than doubled year-over-year to 2.5 million and that growth shows a lot of potential.

Pandora also predicted three months ago that it could break even in the current quarter, which we will find out about when Q2 earnings hit Wall Street at the end of August. If that holds true, it could be the catalyst for another leg up for this streaming radio player.

There are assuredly risks for Pandora stock. Competition in the digital music space is getting tough as Google (GOOG) gets in on the game and Apple (AAPL) continues to be a big player with iTunes. Apple is rumored to be launching a streaming radio service later this year, too.

But Pandora is the gold standard and continues to stay ahead of the pack — not just in growth, but in its build-out. For instance, Pandora recently decided to shift to a direct sales force for ads on both a national and local level, which will significantly prop up profitability. Currently, only about 20% to 25% of Pandora’s ads are sold direct. Moving away from third party ads is a sure way to juice margins.

Throw in the creative decision to buy a “terrestrial radio station” in Rapid City, S.D. — a move that will reduce royalty payments on its music — and you have an interesting case for a better bottom line even without the robust user growth.

The valuation is rich since without any profits to speak of the forward P/E is infinite. And yes, disruption is par for the course here in the budding digital music space.

But you can’t fight the tape, and Pandora looks like a powerful buy as it tests new all-time highs.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here

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