How to Play Specialized Technology

Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Pandora Media (NYSE: PNYSE: P)), SunPower (NASDAQ: SPWR), and Yelp (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 upgrade

California based Internet radio provider Pandora Media 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% 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.

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, Pandora Media’s sales increased 55% 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 will 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 the income statement starts looking in better shape, valuation metrics should start making better sense to the majority of investors. Until then, the skepticism about this stock is good for existing investors.

Yelp sales jump

Yelp is another technology stock that is doing well on the market. Yelp’s other common trait with Pandora Media is that this stock offers ample opportunities for entry at discounted levels. Shares of this review website have zoomed 16% over the last month after reporting a 68% jump in sales to $46.1 million in the first quarter, 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%, 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, SunPower makes physical 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 the 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 the 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.

Foolish bottom line

Overall, these plays may be everyone’s cup of tea. However, for those interested in taking a long call on future earnings, Pandora Media and Yelp offer great potential. SunPower may still outpace these stocks but prudence suggests investors should look into the models which are self sustainable.

Jacob Wolinsky has no position in any stocks mentioned. The Motley Fool recommends Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus