Among the biggest winners in Thursday's early trading are
Pandora Media (
Zale Corp. (
Theinitial 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, itsshares 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)
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 recentIPO that invests heavily with
its limited funds, Pandora actually boosted cash by $2 million to
$82 million, thanks to a similar amount of positive operatingcash
flow . This isn't yet another IPO that needs to belly up to the bar
for yet more cash. On anet 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 takemarket 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 amarket 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 valuableasset that would tuck in
nicely amid a larger media or technology organization. You should
never own a stock on hopes of abuyout , 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
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of GOOG in one or more if its "real money" portfolios.