Morgan Stanley Sees Opportunity in Pandora (P) On-Demand and Upgrades Stock to Overweight
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(Updated - June 27, 2016 9:15 AM EDT)
Morgan Stanley upgraded Pandora (NYSE: P) from Equalweight to Overweight with a price target of $15.00 (from $11.00). Analyst Benjamin Swinburne thinks its core business is worth $11 per share, and he believes launch an on-demand product that could add another ~$4-7 per share in value.
Swinburne explained, "First, Pandora's core radio business, driven by highly engaged listeners, is growing and profitable. This profitability was not clear until the end of last year, after the Copyright Royalty Board set its cost structure through 2020. Second, after 15 years of digital indigestion we think the music industry has found its growth strategy - subscription on-demand and Pandora is positioned to help drive that growth as a result of its leading market share and high engagement in its core radio business."
"We expect Pandora to negotiate access to on-demand or interactive rights with the music labels that both leave its core business economics largely unchanged, and enable it to make money in on-demand. We think the core business is worth ~$11 today, and if on-demand works the whole enterprise can reach $20 by '20. P shares are down ~60% over the last two years, as the core radio growth - still healthy at +27% in 2015 - slowed more than expected, and the rate setting process concluded last year set rates above market expectations," continued the analyst.
Swinburne added, "We estimate that industrywide subscription streaming spending grew nearly 50% in 2015 in the US, and has climbed to ~15% of industry recorded music revenue. Recent launches of new products (Apple Music, Tidal) have illustrated to the labels that more services drives consumer adoption rather than leads to cannibalization (Spotify is also accelerating). This is important, as Pandora is currently negotiating for new rights through direct deals with the labels. While most consumers will continue enjoying free radio, we think ~40 mm on-demand subscriptions in the US in 2020 (~30% of the 130 mm US HH) is a reasonable estimate, with Pandora at a ~25% share. Pandora's contribution profit per customer is likely significantly higher in an on-demand model than in ad supported."
Morgan Stanley's bull case for Pandora is $24 and its bear case is $8.
Shares of Pandora closed at $11.74 yesterday.
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