Pandora Media Inc (NYSE:P), SunPower Corporation (NASDAQ:SPWR), and Yelp Inc (NYSE:YELP) are specific technology plays trending higher in recent days. However, these stocks may be better suited to investors with high risk appetite.
Pandora Upgraded To Outperform
California based Internet radio provider Pandora Media Inc (NYSE:P) has been upgraded to “outperform” from “market perform” by analysts at Cowen. The broker also increased the price target to $22 from $15 in a major vindication to Pandora’s business model. Last month, RBC and Stifel were among other major brokers to raise their targets on the stock. With this background, it does not come as a surprise that the stock jumped more than 22 percent in the last week alone. Skeptics would point out that the company is not profitable and its stock trades at lofty valuations which includes a forward price earnings ratio of 67.6. Both of these assertions are right but misplaced.
At the end of last week, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. The chat spanned many different topics, Read More
Being in the growth phase, the company is far from profitable but has been managing an impressive streak in revenue growth, primarily from its online radio subscriptions and advertising. In the quarter ended April 30, 2013, Pandora Media Inc (NYSE:P)’s sales increased 55 percent to $125.5 million although losses still increased. However, as we have seen with many companies with similar business models, somewhere along the line, this revenue growth would translate into profits. Automobiles are going to be a major revenue growth driver for the company as it expects one-third of all new cars sold in 2013 in the United States will feature its online radio service. As revenues grow and income statement starts looking in better shape, valuation metrics would start making better sense to majority of investors. Until then, the skepticism about this stock is good for existing investors.
Yelp’s Sales Jump
Yelp Inc (NYSE:YELP) is another technology stock that is doing well on bourses. Yelp’s other common trait with Pandora Media Inc (NYSE:P) is that this stock offers ample opportunities to entry at discounted levels. Shares of this review website have zoomed 16 percent over the last month after reporting a 68 percent jump in sales to $46.1 million in the first quarter of 2013 although profits remain elusive. Yelp has long been a takeover target but every time its management decided to stay independent and this approach has worked well for the stock so far. With annual gains of 58 percent, long term investors have made serious money in this stock. In terms of traditional valuation metrics, there are few which would make sense. As the company’s business is largely crowd-sourced, it has few assets and debt.
Sun Shines But How Long
Quite opposite to Pandora and Yelp Inc (NYSE:YELP), SunPower Corporation (NASDAQ:SPWR) makes real products and presents a business model that appeals to a wider array of investors. In the most recent quarter, its revenues jumped to $635 million from $494 million in the same period last year while losses also reduced to $54.7 million from $74.5 million. While its forward earnings ratio of 23.4 is on higher side, it is better than the three digit values for many other similar companies. The only glitch with this solar electric system manufacturer is over-reliance on government for subsidies. In absence of government incentives, growth in solar energy market remains doubtful. As governments remain under pressure globally to cut on expenses, it is possible to see the axe falling on subsidies. The stock has tripled in the last year which is great but this movement opens further downside in the event of a correction.
Overall, these plays may be everyone’s cup of tea. However, for those interested in taking a long call on future earnings, Pandora Media Inc (NYSE:P) and Yelp Inc (NYSE:YELP) offer great potential. SunPower Corporation (NASDAQ:SPWR) may still outpace these stocks but prudence suggests investors should look into the models which are self sustainable.