News Analysis date published New: 
Thursday, August 30, 2012 - 10:35
New Date created: 
Friday, September 7, 2012 - 08:47
New Date last updated: 
Thursday, August 30, 2012 - 10:35

Buy or Sell? Thursday's Winners: P, ZLC

Thursday, August 30, 2012 - 10:35am

Among the biggest winners in Thursday's early trading are Pandora Media (NYSE: P) and Zale Corp. (NYSE: ZLC).

The initial public offering (IPO) of Pandora Media, a provider of online music streaming services, had all the makings of a dud. Though its stock initially opened up on June 15, 2011 at a respectable $20 a share (which was the high end of the range that underwriters hoped to see) and managed to scoot to $26 a few hours later, its shares slid below $18 by day's end. A few months later they were below $15, and by this spring had tumbled to just $8.

Investors assumed that the company was unlikely to gain major traction in a crowded field. After all, bigger players such as Apple (Nasdaq: AAPL), Google (Nasdaq: GOOG), Verizon (NYSE: VZ), Sprint (NYSE: S) and privately-held Spotify appeared to have as good or better a chance at success.

So when Pandora announced really impressive growth metrics on Wednesday evening, investors took note, bidding shares up roughly 20% this morning. Those metrics: How about a 51% jump from a year earlier in second-quarter sales to $101 million? That growth comes on a 48% increase in its user base, to 54.9 million. Anytime you see revenues growing faster than users, it's a great sign because customers aren't being lured with lower-priced come-ons.

Just as important for any recent IPO that invests heavily with its limited funds, Pandora actually boosted cash by $2 million to $82 million, thanks to a similar amount of positive operating cash flow. This isn't yet another IPO that needs to belly up to the bar for yet more cash. On a net income basis, Pandora broke even, compared with a projected loss of $0.04 a share.

Perhaps most impressive, management anticipates that revenue will grow nicely again in the current quarter -- to a range of $115 to $118 million (compared with the $114 million consensus forecast). That kind of sequential growth explains why analysts still think Pandora can boost the top line at least 40% in fiscal (January) 2013 and again in 2014.

But investors may want to go slow here. First, you need to spend time to gauge the growth plans of Google, Verizon and others as they also aim to take market share in the streaming music space. Those competitors have more resources to compete with Pandora. Second, an organization known as the Copyright Royalty Board is assessing whether to raise streaming music royalty rates, which could spike Pandora's operating costs. Last, Pandora is unlikely to post robust profits anytime soon, so this will remain as a “show-me stock” that lacks certifiable valuation support.

Retail is back (!?)
Can we start to see retail stocks in a new light? After all, a disparate group of retailers have delivered solid quarterly results this week, and you can add jewelry company Zale Corp. to the mix. Just-released second-quarter same-store sales rose a hefty 8.3%, helping the company to trim quarterly losses.

(Please note that in this column, we are only analyzing companies with a market value of at least $200 million, and Zale falls just short of that threshold. But we did want to point out another gainer in this rebounding sector.)

When the Labor Day weekend is complete, one of your first moves should be to study up on the retail sector. We may just be seeing early signs of an upward industry move.

Action to Take --> Pandora has done an outstanding job, despite the concerns expressed above. Management has built up a valuable asset that would tuck in nicely amid a larger media or technology organization. You should never own a stock on hopes of a buyout, but such a move appears to be the logical end game for this company. Chasing shares, after their huge rally, doesn't seem to be the prudent course, so you may want to wait for a pullback.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of GOOG in one or more of its “real money” portfolios.

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