Schaeffer's Trading Floor Blog

Weekly Contrarian: Is Pandora Facing Some Headwinds?

Despite P's 45% year-over-year deficit, the brokerage bunch remains optimistic

by 11/6/2012 11:28 AM
Stocks quoted in this article:

In a recent article on CNNMoney.com entitled Why (almost) everybody loves Pandora, the author waxes optimistic about Wall Street sophomore Pandora Media Inc (NYSE:P). Specifically, the author notes, "The Internet music service exemplifies the mega trends that have defined the current generation of Web companies -- mobility, dependence on the cloud, and slick, user-friendly design. No less, its performance as a public company has largely made investors happy."

On the fundamental front, P continues to add to its subscriber base, reporting a year-over-year gain of 19.7 million subscribers in September. Plus, the author points out that 1.6 billion smartphones are projected to be sold globally in 2016, and with P's app ranked as one of the top 25 downloaded at Apple Inc's (NASDAQ:AAPL) app store, and 100 million subscribers listening via smartphones, the company's future looks bright.

The author does contend that P could experience a few speed bumps on the road ahead, with competition among online music providers stiff. Plus, the company is waiting on a royalties-related law to make its way through Congress, with the lofty amount P currently pays on a per-song basis weighing heavily on the company's top line. However, the author concludes that, regardless of the outcome, "Pandora is likely to stay in the center of the storm."

Takeaway

On a technical basis, P has struggled in the long term, with the stock shedding almost 45% over the past 52 weeks. Additionally, during the last 40 trading sessions, the equity has underperformed the broader S&P 500 Index (SPX) by roughly 19 percentage points, on a relative-strength basis. More recently, P has contended with double-barreled resistance from its 10- and 20-day moving averages, which have ushered the equity lower since late September.

The investing crowd has taken notice of the stock's technical difficulties. In the options pits, the equity's 50-day International Securities Exchange (ISE)/Chicago Board Options Exchange (CBOE)/NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.71 ranks in the 70th percentile of its annual range. In other words, bearish bets have been scooped up over bullish at a faster-than-usual clip in recent months.

Elsewhere, short interest accounts for a brow-raising 27.3% of the stock's available float. In fact, it would take more than two weeks to cover these shorted shares, at P's average daily pace of trading.

However, the brokerage bunch is holding the technical laggard in an optimistic light. No fewer than 13 analysts still recommend P as a "buy" or "strong buy," compared to five that maintain "hold" or "strong sell" suggestions toward the stock. What's more, the consensus 12-month price target of $13.26 represents not only a brazen 58.4% premium to the stock's closing price of $8.37 on Monday, Nov. 5, but also stands in territory not explored by the equity since early March.

From a contrarian perspective, such an ample amount of bullish sentiment from the analyst community could certainly have bearish implications going forward. In the near term, a round of downgrades and/or price-target cuts in light of P's poor price action could apply further selling pressure to the already struggling stock.


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