Pandora Popped, But Will It Crash Again?

NEW YORK ( TheStreet) -- Just like TheStreet, Pandora ( P) will be at the Consumer Electronics Show (CES) in Las Vegas this week.

Last year at CES, Samsung introduced a refrigerator -- a $3,500 refrigerator -- that runs several popular apps, including Pandora. Aside from Netflix ( NFLX), you cannot find a company that achieved ubiquity faster.

Both companies secured placement on dozens of consumer electronics, from streaming players to remote controls and beyond.

In the auto, only Sirius XM ( SIRI) satellite radio -- now in an impressive 42 brands -- saturates the motor vehicle more.

As of last check, with 23 automotive partnerships, Pandora is actually ramping up its presence at a faster historical clip.

At Pandora, listener hours -- particularly on mobile -- continue to increase. Same with revenue. Unabated. Yet the stock gyrates more than most other major names. Look at the volatility. You just can't own this thing -- or can you?

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Don't blame Pandora's business model for the crappy stock. Pandora has been up against it vis-a-vis content acquisition costs since before its IPO. If the issue really spooked investors, the stock would've gone down on big music royalty-related news and stayed down. Instead, it regularly surges, only to violently crash. Ahead of earnings, it's on the upswing, but don't trust it. P Chart P data by YCharts

While Pandora was likely cautious on its last report -- a beat for the November, December, January quarter would not surprise me -- its stock does not trade on the basis of a business outlook. No doubt, it dropped on disappointing guidance with its most recent report, but, again, it refuses to stay down. Ultimately, it trades on noise.

Almost every time a competing service gets announced the stock takes a hit. Samsung announced one. Pandora went down. Lowly Nokia ( NOK) and Research in Motion ( RIMM) came to with feeble offerings. Pandora dropped.

Then, of course, there's Richard Greenspare of BTIG Media who is due any day now for a cautious mention on P (that's what always calls them). With guys like that unfortunate parts of the conversation, you can never know what to expect.

Rumors of a streaming radio product from Apple ( AAPL) have hit Pandora harder than any other. While I don't see the sense in Apple getting into Pandora's business -- it's better off seeking a partnership to integrate Pandora or another existing service into iTunes -- a credible person or two tells me it's only "a matter of time" before it happens.

Pandora will, without much of a sweat, survive an Apple challenge, but, even if it never happens, persistent Apple rumors and other noise will continue to hit the stock.

My ground rules for owning this type of name:
  • Consider it a long-term speculative play. Define long-term in multiple years, not months.
  • Look away for no more than 10 to 15 trading days, preferably fewer.
  • Allocate no more than 5% to 10% of your portfolio to the stock. How much depends on your risk aversion, size of portfolio, income, etc.
  • Write at- or slightly in-the-money calls against at least 50% of your position.
  • Sell at least 50% of your position on pops (like the one we're seeing now) or simply watch shares get called away.
  • Add to your position on dips, such as the one Pandora just rebounded from.

If Pandora ends up being for real and takes off (I think this happens over the next one to three years), you'll have a starter position you can more confidently add to. If it doesn't, you probably will not have hurt yourself too badly.

Before I became a full-time employee of TheStreet (company policy prohibits full-time editorial staff from owing individual stocks with the exception of TheStreet ( TST)), I exited a position in P. Even with a cost basis of $10.19, I closed the position just above breakeven thanks to covered call writing.

You can own Pandora.

If you have well-thought out, long-term conviction when others are bearish, it's the type of stock that can pay off in a big way over the long haul (see, e.g., Sirius).

However, you must not be a passive shareholder. Buy on dips, sell on spikes and write covered calls. Don't go overboard. That type of moderation might keep you from making a killing, but it, more often than not, it will keep you from getting killed.

--Written by Rocco Pendola in Santa Monica, Calif. Pendola is long TST in multiple accounts.
Rocco Pendola is TheStreet's Director of Social Media. Pendola's daily contributions to TheStreet frequently appear on CNBC and at various top online properties, such as Forbes.