Is Pandora Bottoming Out?

Investors have been tuning out of Pandora (NYSE: P  ) lately. The stock has shed 30% of its value since peaking last month at $40.44.

It's hard to feel sorry for Pandora investors. The stock nearly tripled last year, and even the sharp sell-off in recent weeks finds Pandora still trading in positive territory for 2014. That's not too shabby when one considers the various challenges posed by everything from Apple's arrival on the scene with the similar iTunes Radio in September and Spotify relaxing some of the terms of its on demand platform. 

However, investors figuring that Pandora would finally catch a break when an analyst upgraded his rating on the stock this morning were instead dealing with another case of the stock selling off on encouraging news. Wedbush's Michael Pachter upgraded Pandora from neutral to outperform, slapping a $35 price target on the stock.

Pachter's change of heart should have been a game changer. After all, Pachter had the misfortune of downgrading the stock early last year when the stock was trading in the pre-teens. His valuation fears seemed sound. His expectations for Apple to roll out a streaming service later in the year played out. However, the stock still soared 190% in 2013. Pandora's popularity and its improving ad-based monetization efforts paid off. Active user gains have been decelerating, but top-line growth has been climbing nicely as Pandora milks more money out of its listener hours.

Analysts and investors came around to embrace Pandora after his initial downgrade, and now he's back in what may seem to be another contrarian move by backing the stock after a sharp correction. He's probably right this time. Pachter is encouraged by Pandora's strong performance in March. Pandora served up a record 1.71 billion hours of content last month, and attracting 75.3 million active users makes the analyst target of 76.2 million listeners by the end of 2014 a pretty conservative goal.

Investors will naturally want to keep an eye on any growth metrics that Apple puts out. It was initially chatty about strong iTunes Radio milestones, but it's been quiet lately. The market will also naturally be tuning in to Pandora's monthly metrics until the dot-com speedster stops putting them out in early June.

Given Pandora's steady, if not improving, fundamentals, it seems as if the recent sell-off presents a compelling entry point. The challenges are real, but they were also real a month ago when the stock was trading well above Pachter's now seemingly optimistic $35 price target. It's Pandora's turn to pump up the volume, once the market can come up with a catalyst beyond today's analyst upgrade that actually sticks.

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