In the midst of deeply disappointing performances, any solid news is treated like a profound revelation. I believe this is the case for Pandora Media Inc (NYSE:P). After an unexpected first-quarter earnings beat, P stock closed up nearly 20% after the announcement. For the year, P shares have gained 43%.
Along with a few of my InvestorPlace colleagues, I’ve had a dim view toward Pandora Media stock. However, I admit that if the company had potential, we’d have to see something substantive now. Management, for once, didn’t disappoint, putting together a series of metrics that give speculative buyers rational justification.
On an adjusted basis, P stock lost 27 cents a share, paring losses significantly better than the forecasted 38 cents. Just as importantly, Pandora delivered $319.2 million, up 5% from the $304 million consensus.
Sales results have been particularly concerning for the company. Between 2006 through 2014, annual revenues averaged 108%. But since the beginning of 2015 onwards, sales growth slipped precipitously to 17%. The recent Q1 haul was a step in the right direction, although not a spectacular one.
Undeterred, optimists bought into Pandora Media stock for its jump in paid subscribers. The company brought in 5.63 million paid subs, a 19% increase from the year-ago quarter. Combined with its 72.3 million active listeners, management has several opportunities to turn the ship around.
That said, chasing a 20%, day-over-day profit seems incredibly risky. In fact, it’s the biggest such lead in company history. The last time we saw something of this magnitude, P stock closed up 17.6% on March 8, 2013.
So should you buy into the Q1 enthusiasm? Or is Pandora Media stock a fool’s errand?
P Stock Is a Gamble and Not Necessarily a Good One
While you can never completely discount the upside opportunity for any company, ultimately, I side with our own Aaron Levitt. Earlier this year, he wrote that P stock is a “buyout gamble.” I’ll show you why that’s not only true, it’s not necessarily a good gamble, either.
Since its market introduction, Pandora Media stock has had 16 sessions where shares jumped double-digits over the prior trade. One week after the double-digit move has occurred, shares returned a profit 10 times, or a 62.5% success rate. And when Pandora hits, it hits big, gaining nearly 56%. The total average return a week after a double-digit swing is 27%.
Given these incredible stats, you might think that P stock is a buy, at least for a short-term trade. However, the picture changes dramatically when you consider robust moves in recent years. Starting from 2015 onwards, the average positive return one week following a double-digit session falls to 12%. Should you miss, you’ll pay dearly for it. On average, you’re staring at 31% losses.
Therefore, if you’re going to gamble, you have to get in and out quickly. If you’re profitable, don’t get greedy. If you’re not profitable, be prepared to cut your losses.
I say this because in the longer-term picture, gambling on Pandora Media stock is literally a coin flip. Following a double-digit performance, P shares a month later and a year later have 50/50 success ratios. You are just as likely to be profitable as you are to lose money. Moreover, your average reward potential decreases over time.
One month later, you’re looking at average returns of 25%. One year later, the profitability potential falls to 16%.
Q1 Earnings Didn’t Really Prove Anything
It’s worth noting that while Pandora’s recent jump in paid subs is encouraging, it pales compared to Apple Inc. (NASDAQ:AAPL) and Spotify Technology SA (NYSE:SPOT). Apple Music has 40 million paid subs, while Spotify has 75 million.
Curiously, its active listener count slipped to 72.3 million. At the last count, the company had 74.7 million active listeners.
Essentially, Pandora’s Q1 earnings report demonstrated only that they’re improving against themselves. But stacked up against serious competition, P significantly lags. Worryingly, it could become irrelevant.
One final warning I’ll give about P stock is this: since 2015, a double-digit move never transpired into a profit one year later. Granted, this was right at the time when investors started punishing Pandora for its fundamentally poor performances.
Still, a 0% metric isn’t a good success rate. That’s why I’m staying away from P stock. Situationally, it has limited nearer-term upside. On a longer-term framework, the risks far outweigh the rewards.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
