Pandora (P) Overhang Removed, Focus on New Foreign Markets - Rosenblatt
Rosenblatt analyst, Martin Pyykkonen, published a note on Pandora (NYSE: P) citing two reasons the stock could rally and a problem that could trump the first two points.
1) New Foreign Markets Within the Next Year
2) CRB Overhang Is Removed
3) Listener Hour (Usage) Growth Needs to Rebound
With the recent removal of the overhang around the CRB rate setting for Pandora’s streaming radio service, Pandora could gain some traction among longer term investors in the new year. Starting on 1/1/16, Pandora will pay $0.17 per 100 songs streamed performance, vs. $0.14 currently. Pandora had proposed $0.11 per 100 songs, but bearish calls projected rates as high as $0.20 per 100 songs. On a blended basis of free ad-supported streaming and the company’s Pandora One subscription service, the average royalty cost will increase ~15% in 2016.
With the CRB process now completed, new foreign markets are possible for Pandora starting next year and beyond. Pandora has recently struck several direct label music licensing deals (e.g., Sony Music, Warner and smaller independent labels).
Pandora has been able to cherry pick many top salespeople from the traditional terrestrial radio industry, who are then able to go back to establish customer relationships (after some non-compete time period in most cases) and the sell the Pandora ad platform. Audio ads are currently ~2/3 of total advertising revenue and local ad revenue was 25% of total advertising revenue as of 3Q15. With higher CPMs and an established sales force with critical mass, local radio ads are clearly the sweet spot for Pandora’s ad sales revenue growth.
Pandora’s most recently reported results (3Q15) slightly missed expectations, but more importantly Pandora reduced full year 2015 guidance and issued 4Q15 guidance below the current street mean. This could be overlooked if you believe that it is due to conservative guidance by Pandora’s management is in light of Apple Music’s launch in July. The analyst's key metric, usage per user, was stable in 3Q15 at ~66 hours which implies stable demand within its core base.
No change to Buy rating or $20 PT.
Shares of Pandora closed at $15.26 yesterday.