Who Would Buy Pandora?

02/12/2016 9:05 am EST

Focus: STOCKS

Michael Berger

President & Founder, Technical420.com

When it comes to this music streaming service, although revenue during the fourth quarter missed Wall Street expectations and he acknowledges that execution risk is still present, Michael Berger of Technical420.com outlines why he feels expectations have been reset and downside is limited.

After the New York Times reported that Pandora (P) was working with Morgan Stanley (MS) to identify potential acquirers Thursday, shares rallied more than 10%.

The report did not mention a specific buyer but we think potential suitors could be Facebook, Inc. (FB), Alphabet, Inc. (GOOG), Netflix, Inc. (NFLX), and Amazon.com, Inc. (AMZN).

P ended the day up more than 8% and we highlighted P as a trading opportunity in this article Thursday. Although our trading thesis was based on the company reporting better than expected earnings and the markets rallying back Friday, we are pleased with the outcome.

Earnings Show Continued Strength from Core Business

After the market closed Thursday, Pandora reported a noisy fourth quarter that came in below expectations. Although revenue during the quarter missed Wall Street expectations, P generated 25% more revenue when compared to the same period last year.

Pandora reported better than expected monthly hours per active user and more revenue per 1,000 hours listened. This shows that the company’s core business remains profitable and P continues to improve how it monetizes its users.

Expectations Reset and Downside Is Limited

Our investment thesis for Pandora is based off of the company monetizing investments made during the last year. Pandora’s fourth quarter results support our thesis and while we acknowledge that execution risk is still present, we believe expectations have been reset and downside is limited.

P is trading in positive territory Friday morning and we would exit our position as soon as the market opens. Traders that took our advice could have generated a return greater than 15% through a stock position or greater than 90% through an option position. Not too bad for less than one day!

Michael Berger, Founder and President, Technical420.com

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