Pandora, SunPower: How to Play Specialized Technology

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 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 Inc (NYSE:P)’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 Inc (NYSE:YELP) is another technology stock that is doing well on the market. Yelp’s other common trait with Pandora Media Inc (NYSE:P) 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 Inc (NYSE: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.