Why Goldman Sachs Sees Pandora Rising to New All-Time Highs

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Pandora Media Inc. (NYSE: P) is trading as though the entire risk to its business model has shifted from uncertainty to solid profits in 2014, 2015, and beyond. There remains a large degree of skepticism around this stock, yet Goldman Sachs gave this a solid upgrade. We might question the timing of the upgrade and think it is probably a ‘late to the party’ call, but the reality is that shares are flying as a result. Goldman Sachs raised the rating to Buy from Neutral. What really stands out in this analyst upgrade is that the price target was put all the way up at $27.00 for a one-year target.

Goldman Sachs previously had a price target of $18.00 on Pandora. The driving force is mobile advertising gains. There also a lower amount of concern about competition in the upgrade rationale, and its large customer base was called “underappreciated.” Goldman Sachs even expects its revenue growth to rise faster than its expense growth, which if you recall was the damning part of Pandora’s business model before. So many investors have been worried that for each incremental gain in use that the royalty payments rise by the same amount.

What we would also point out is that the prior street-high price target was $25 for Pandora’s stock on Wall Street. The consensus price target before this upgrade was only about $20.32. In short, Goldman Sachs is now more bullish than every single other analyst on Wall Street.

Here is where things get very difficult to evaluate. The Thomson Reuters has a consensus estimate of $0.04 in earnings per share and about $633 million in revenues for this year. Consensus estimates for the following year are $0.30 in earnings per share and about $867 million in revenue. Seeing a forward P/E ratio of 525 but seeing a forward P/E of 70 is not as alarming. Now it all depends upon whether Pandora will exceed estimates or not to adjust that valuation lower.

Pandora shares were up 5.8% at $21.00 in late-Friday trading and the stock hit a high of $21.50 on Friday morning. Despite a $3.67 billion market cap, what investors really need to pay attention to here is that the only time Pandora shares were ever high was in the days after its IPO in June of 2011. By September of 2012 the stock had already traded down under $10.00.

Maybe this time is different, but we still feel like this call may be one that is late to the party unless there is some information that is not widely understood. One last issue is the Short interest which we have taken from the NASDAQ site as an image here. The timing of the upgrade seems late to us, but you will see that the short interest is steadily coming down here.

Pandora Short Interest
Source: NASDAQ

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