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Pandora Earnings Will Beat Big-Time, So Buy P Stock Now

pandora stock logoTypically, I am very leery of chasing momentum stocks like Pandora (P) — which is up more than 125% in 2013 — but I have written so many bullish articles on P stock that last week I actually took my own advice: I added some Pandora stock at about $20 a share.

I think smart investors will follow this lead and buy the stock, too, in advance of Pandora earnings on Thursday, Aug. 22.

The most recent Pandora earnings report out in April showed higher-than-expected Q1 sales and a loss in line with forecasts as its listening audience doubled to top 2.5 million subscribers. P stock saw a rough June after that report — as did the entire market thanks to a broader pullback — but after briefly touching the low $14s, Pandora stock raced above $20 a share in short order.

Then last week, Goldman Sachs (GS) upgraded Pandora stock, sparking another move higher for the streaming radio company. The investment bank is very bullish on Pandora earnings this time around, and P stock is rallying about 6% today on the news.

Clearly I’m not the only one who likes Pandora stock right now.

Pandora Earnings Could Impress Big-Time

Pandora has predicted that it might break even in the current quarter, and Wall Street is expecting a small profit when Pandora reports earnings this week. For a host of reasons — including recent upward revisions to estimates and a push to install home-grown ad sellers instead of third-party advertising contracts that have lower margins — I personally expect Pandora earnings to exceed expectations.

If that happens, Pandora earnings could catalyze another strong move higher for the stock on a short squeeze. Nearly a quarter of the float in P stock was sold short as of the end of July, and strong Pandora earnings will result in short sellers buying to cover their trades. If Pandora stock can move soundly into profitability, that will fuel the perception that its a legitimate investment and scare out the bears.

Sure, volatility is persistent in Pandora stock. There’s no guarantee that even on modestly strong Pandora earnings, this Internet stock will move higher or even hang tough. P stock has been on a roller coaster since its 2011 IPO at $16 a share, popping briefly to $20 then crashing to $7 in late 2012 before regaining the $20 mark very recently … so big moves happen both ways.

And bigger-picture, Pandora stock is hardly the only way to play the new world of streaming radio. Google (GOOG) has its Play Music streaming audio service and Apple (AAPL) continues to be a big player with iTunes as well as launching a streaming radio service of its own. And don’t count out Sirius XM Radio (SIRI) or iHeartRadio, owned by privately held Clear Channel Communications.

But I remain convinced there’s big upside in Pandora stock. As a listener myself, I am almost shocked at the lack of advertising considering how much music you get and the versatility of Pandora mobile apps. And if you look at the company info, only about 20% to 25% of Pandora’s ads are sold direct, meaning the company relies on a lot of third-party ads. Simply staffing up the ad sales force will help margins and profitability at P stock significantly.

Also, a scheme to buy a “terrestrial radio station” in Rapid City, S.D., could reduce royalty payments on its music — presuming a lawsuit over the deal ends favorably, or at least opens the dialogue up for Internet radio companies looking to get a better rate on royalties as compared with their AM/FM brethren.

Pandora stock’s valuation is admittedly a bit rich, since its P/E is potentially infinite or nonexistent if the company can’t manage to post a consistent profit. And yes, the risk of disruption is real.

But this Internet stock is not just another digital fad. Goldman Sachs just upgraded Pandora stock, and I just bought P stock ahead of Pandora earnings. Other investors should take note.

Buy quickly though if you want to get in before Q1 numbers, though, because Pandora earnings hit the market Thursday.

Related Reading on Pandora Earnings and P Stock

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” As of this writing, he was long P. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

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