Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Pandora Media (NYSE:P) stock is on a tear.

After reporting earnings Thursday, Pandora shares soared 20% in early trading Friday. Wall Street bankers are scrambling to jump on the bandwagon, with at least two analysts so far rushing out new buy ratings on the stock, and a third doubling down, according to reports on TheFly.com.

What's got the Street so excited about Pandora -- and are the bankers right to recommend it? Read on and find out.

Woman on bus listening to music on phone

Image source: Getty Images.

Pandora reports

Let's first give you a quick rundown of the results. Yesterday, Pandora Media reported its financial results for fiscal Q1 2018. Pandora reported $0.55 per share in GAAP losses for the quarter on a mere 1% increase in revenue. (Pandora shut down its service in Australia and New Zealand, and sold its TicketFly unit, which hurt sales in the quarter. Its continuing operations grew 12% year over year.)

Non-GAAP EPS was $0.11 better than Wall Street had expected, and Pandora's sales -- $319.2 million -- were $15 million ahead of estimates. Pandora's per-share GAAP loss was also $0.01 slimmer than what it lost in the year-ago quarter.

Arguably best of all, Pandora reversed last year's cash burn and produced $17.4 million in positive cash from operations. Minus $3.4 million in capital spending and $5.5 million in capitalized software costs, that left the company with positive free cash flow of $8.5 million for the quarter.

What Wall Street said about that

So far, TheFly.com reports that three analysts have chimed in on Pandora's results: B.Riley/FBR and SunTrust, both of which upgraded the stock to buy, and Canaccord Genuity, which reiterated its existing buy rating and raised its price target on the stock to $8 a share.

Here's what they had to say:

  • Riley: Pandora's near-term opportunities are "enticing" and the shares are "worth a shot" below $7 a share. (Like Canaccord, B.Riley believes the stock the stock could go to $8 a share within a year.)
  • SunTrust: "Premium Access" -- which gives listeners a taste of Pandora's paid Premium service in exchange for watching a 15 second ad -- could help turn earnings before interest, taxes, depreciation, and amortization (EBITDA) positive in fiscal 2019. Engagement, retention, and conversion numbers are all improving.
  • Canaccord: Pandora has now improved its performance in two consecutive quarters. Its audience is shrinking, but at a slower pace than before, and Canaccord believes management will find a way to reverse the slide and then to grow it again.

Room for improvement

Speaking of that slide, though, let's address it. Pandora reported that "total listener hours" on its service "were 4.96 billion for the first quarter of 2018, compared to 5.21 billion for the same period of the prior year." That's a 5% decline in listenership. "Active listeners" declined even faster, down 6% year over year to 72.3 million.

(The number of paid Pandora Plus and Premium subscribers was 5.63 million -- about 7.8% of all active listeners on the service. Management says it grew in the quarter, but did not detail how much.)

Nor did management give guidance in its earnings report as it did last year. Instead, it revealed this news only on its post-earnings conference call, advising that it is aiming to book $360 million to $375 million in Q2 revenue this quarter. (At the midpoint, that's below Wall Street estimates.) Management also admitted that its EBITDA will probably run negative this quarter, and its cash reserves will decline -- suggesting a reversion to negative free cash flow.

The upshot for investors

Analysts may be right about Pandora earning positive EBITDA in 2019, or analysts may be wrong. The only thing that seems certain is that Pandora is not there yet, and won't be next quarter, either. Also, although Pandora stopped its cash burn in Q1, it looks like cash will resume smoldering in Q2.

Over the past 12 months, by the way, Pandora has consumed a total of $174.5 million in cash burn, according to data from S&P Global Market Intelligence. And despite the positive mentions on Wall Street today, most analysts still predict that Pandora will post negative GAAP earnings at least through 2022, and remain free-cash-flow negative through 2020.

If you ask me, that's a long time to wait to see if Pandora can turn profitable -- especially since all along the way, it must contend with rivals such as Sirius XM, Spotify, and Apple as they fine-tune their own music services and try to drive Pandora into the ground.

Wall Street may think Pandora is a buy today. Some investors may be optimistic about the company's prospects -- but I am not one of them.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AAPL and Pandora Media. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.