Pandora Media Inc (P): Buy, Sell or Hold?

Pandora Media (P)Barrington reiterated its Outperform rating on Pandora Media Inc (NYSE:P), and raised its price target from $15 to $18 on the stock. Barrington said in its report:

Revenue momentum improving; ad sales staff being increased: Pandora Media Inc (NYSE:P) is investing in its sales staff to further efforts to take advantage of increasing levels of listening coupled with rising levels of mobile pricing. Listening is now 75% mobile, and management is stepping up hires of top salespeople in local markets to more effectively lay out Pandora’s value proposition for targeted mobile listening audience to advertisers used to dealing with local broadcast radio.

Shares of Pandora Media Inc (NYSE:P) soared after the company released bullish fiscal fourth-quarter results. On March 7, 2013, the company reported a loss for the quarter of $14.6 million, or $0.09 per share, compared to a loss of $8.18 million, or $0.05 per share, in last year’s corresponding quarter. On an adjusted basis, the loss was $0.04 per share, which beat consensus estimates calling for a loss of $0.05.

Ad sales in the period were up 51% to $109 million, while royalty payments rose 59% to $77 million. Net revenue for the quarter climbed 54% to $125.1 million, beating Wall Street consensus expectations of $122.8 million. This post will focus on Pandora’s growth drivers, and fierce competition in the music streaming business.

Pandora’s growth drivers

Growing user base: Pandora Media Inc (NYSE:P)’s user base is still growing. It finished last month with 67.7 million active listeners, claiming roughly 8.5% of the domestic radio market. However, active listener growth has declined slightly, from 47% in the previous quarter to 38% at the end of January.

Mobile revenue growing fast: Pandora’s mobile revenues grew 105%, while listener hours rose 89% — increasing the average mobile RPM to $23.83 — up from $21.93 in the last fiscal. The improvement in mobile RPM is a result of increased investment in the sales team and the slowdown in growth of listener hours.

Overall revenue growth positive: Pandora registered a three year average revenue growth of 142.1% as against the industry average of 10.9%. Given the economic slowdown that persisted in the last few years, this is no easy feat.

FY 2014 guidance: Revenue guidance for fiscal year 2014 suggests strong revenue growth will continue. They’re looking for revenue of $600 million to $620 million, above consensus estimates. EPS guidance is also a bit above consensus estimates, with the company anticipating EPS of $(0.05) to $0.05, net of stock-based compensation expenses.

Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) looking into music streaming

The rumor that Apple would pursue its own music streaming service has been buzzing around for a while. Many observers feel that a streaming service would fit naturally alongside iTunes, which currently accounts for about 60% of all digital music sales. Recent developments in the relationship between iTunes and iCloud suggest that there is room in the Apple ecosystem for streaming media.

Rumors are doing the rounds that Google is also looking into the space. In February, the Financial Times reported that Google was in talks with major music labels over that possibility. The news stacks with the company’s plan to sell subscriptions to channels on YouTube. A person familiar with the matter told the publication that a subscription could cost between $1 and $5 per month.

Google owns YouTube, the largest video streaming site in the world by a huge margin, and Play Music, the service that lets users download songs from a catalog of over 13 million tracks. It makes perfect sense for the tech giant to move into the music streaming business, and according to the Financial Times, that is precisely what Google is doing. Google has a reputation of offering free or cheap services, which would put even more pressure on a competitive and notoriously difficult industry.

Pandora: Vulnerable to competition?

“We have made Pandora Media Inc (NYSE:P) a de facto must-have for any Internet-connected device,” Pandora CEO Joe Kennedy said at an investor conference, where he was asked if Apple would consider yanking Pandora from iPads, and if it creates a competing music service. “I don’t think we have any fear of losing distribution on any of the iOS platforms,” Kennedy added. “That would be suicidal for Apple to remove Pandora from its platforms. That would probably be the greatest gift they could give to Google and Samsung. So, if Apple were to do something, they’d have to compete with us straight up.”

If Google and Apple start music streaming services, they will not be guaranteed success. The technology giants will be entering a field which is already saturated with a dozen of players, and according to the industry experts, not everyone is going to survive. Streaming media analyst Russ Crupnick said that the world does not need dozens of streaming services. He added that there will be tremendous challenges to get some elbow room in the marketplace.

Google and Apple could be well positioned to get success in streaming music because of their sheer size and the brand recognition. However, merely being a household name may not be enough.

The verdict

Pandora Media Inc (NYSE:P) said it expects a 40% growth in revenue in the coming year. But Pandora’s “superior growth outlook” could be more than offset by potential competition from Apple or Google, which would “materially impact Pandora’s market share.” Other competitors include and Spotify. What does Pandora need to fight this large-scale competition? Innovation. The core business is strong, and Pandora needs to capitalize on it. Until that happens, Pandora is a Hold for me.

The article Pandora: Buy, Sell or Hold? originally appeared on and is written by Anindya Batabyal.

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