Pandora Media Inc (P), Lumber Liquidators Holdings Inc (LL), Lockheed Martin Corporation (LMT): Monday’s Top Upgrades (and Downgrades)

Why all the bullishness? Needham thinks Pandora Media Inc (NYSE:P) has passed the “breakeven” point in its business, and will collect $871 million in revenues in 2015, and earn operating income of $23 million that year.

That emphasis on operating income is important for two reasons. First, operating profits are not net profits. They’re the “profits” a company gets before they reach the bottom line. The “profits” before all expenses have been deducted — so not really “profits” at all. From a net profit, bottom-line perspective, Pandora Media Inc (NYSE:P) is still losing money hand over fist ($46.5 million lost over the last 12 months).

Second, Needham admits that the upcoming fiscal second-quarter 2014 report will show that for now, at least, even Pandora’s operating results remain in losing territory. True profitability may or may not arrive by 2015. But for now, it’s not here — which is why Pandora continues to be plagued by a negative P/E ratio. As a result, the fact that Pandora Media Inc (NYSE:P) is said to be expecting 45% annualized profits growth (according to Wall Street analysts) doesn’t mean much — because growing a negative number doesn’t mean much. (And of course, free cash flow at the company remains negative as well, with more than $13 million burnt over the past year).

Long story short, Needham may be right about Pandora, or it may be wrong. Until the company actually proves itself capable of earning a net profit, or at least of producing positive free cash flow, assigning any specific valuation to the shares remains pure speculation.

The article Monday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Lumber Liquidators and Pandora Media. The Motley Fool owns shares of Lockheed Martin and Lumber Liquidators.

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