CRB Decision Hands Pandora (P) a 'Hat Trick' - Needham & Company Reiterates Buy
Needham & Company reiterated a Buy rating and $24.00 price target on Pandora (NYSE: P) following a CRB decision that handed the company a series of wins. The CRB raised P’s total costs by 15% to a blended rate of $0.176/100 songs, made up by 20% higher advertising music costs to $0.17/100 songs in 2016, partially offset by lower subscription music costs of $0.22 in 2016.
Analyst Laura Martin commented, "The CRB decision handed Pandora a hat trick of wins, including: 1) P can now be acquired by a strategic buyer because the CRB deleted historical language that de facto prevented this; 2) although P’s blended cost of music rises 15% in 2016, annual increases fall to CPI (i.e., 2-3% annually vs 7% historically) suggesting higher FCF’s over the next 5 years; and 3) after 2 years of wondering whether the CRB would set P’s music costs at a level that would put Pandora out of business (since music costs represent about 50% of P’s revenue), certainty for the next 5 years allows P to maximize profits, which implies a shift toward subscription revenues, which should expand valuation multiples. We expect P to launch an on-demand service, and to expand offshore in 2016, suggesting accelerating growth and an expanding valuation multiple."
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Shares of Pandora closed at $13.44 yesterday.