Pandora: Growing Pains Include New Rivals

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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Pandora (NYSE:P) will report its fiscal Q1:14 (ending April) results after market close on Thursday, May 23, and hold a conference call at 2:00pm PT (877-355-0067, webcast: http://investor.pandora.com).

We expect Q1 results in line with our bullish estimates. We expect revenue of $130 million and EPS of $(0.08), compared to consensus of $124 million and $(0.10), and guidance of $120 – 125 million and $(0.13) – (0.10). Listener hours of 4.18 billion tracked below our expectations of 4.25 billion, but we believe that improving mobile RPM made up for this slight shortfall. We note Pandora has met or exceeded the high-end of guidance and consensus for the past four quarters.

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Investors will remain focused on mobile growth as web usage and overall RPM slowly decline. Q4 mobile revenue was $80.3 million, up 111 percent y-o-y, and well above mobile listener hours growth of 70 percent, reflecting improving monetization. In addition, mobile RPM of $25.05 was up over 20 percent y-o-y. The new 40-hour-permonth cap placed on free mobile listening may have negatively impacted listener hours, but we believe advertising effectiveness is inversely correlated to totalhours, allowing Pandora to charge more for advertising.

We expect a partial pass-through of any Q1 beat. Last quarter, Pandora provided bullish FY:14 guidance for revenue of $600 – 620 million and non-GAAP EPS of $(0.05) – 0.05 vs. consensus of $600 million and $(0.02). We expect fullyear guidance to be increased only by a partial pass-through due to the unclear long-term impact of the mobile listening hour cap and increasing competition.

Competition will intensify for the foreseeable future. On Wednesday, Google (NASDAQ:GOOG) introduced All Access. With on-demand music and a $9.99/month subscription fee, All Access is viewed as a direct competitor to Spotify. However, services such as these have the potential to take listener hours away from Pandora if adoption is strong. We continue to expect a web-based radio offering from Apple (NASDAQ:AAPL) in the near future, but agreements with record labels appear to be progressing slowly.

Reiterating our NEUTRAL rating, but raising our 12-month price target to $15 from $11.50. Our revised price target reflects a multiple of 30x likely CY:15 EPS of $0.50. With the recent run-up in share prices for many Internet names, we feel comfortable assigning a higher multiple to Pandora shares. In our view, Pandora’s superior growth outlook is partially offset by the potential for increased competition.

Michael Pachter is an analyst at Wedbush Securities. 

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