Pandora Media Earnings Outlook: Will Apple Take a Big Bite?

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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 Q3:13 (ending October) results after market close on Tuesday, December 4, and hold a conference call at 2:00pm PT (877- 355-0067, passcode: 35603295, or via webcast: http://investor.pandora.com).

We expect Q3 results above the high end of guidance. We expect revenue of $121 million, vs. consensus of $117 million, and guidance of $115 – 118 million. The top-line beat should be driven by higher CPMs from a stronger advertising presence driven by political ad spending, as well as continued market share gains. We expect EPS of $0.03, vs. consensus of $0.01, and guidance of $0.00 – 0.01. We note that recent results have been significantly above guidance due to continued market share gains and effective cost control.

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We expect management to again raise FY:13 guidance for revenue of $425 – 432 million and EPS of $(0.08) – (0.04). Pandora exceeded the high end of guidance in three of four quarters as a public company. After failing to fully pass through the Q1 EPS beat, last quarter management passed through the Q2 EPS beat. We expect continued conservatism, with guidance increased by the beat.

On Wednesday, CEO Joe Kennedy testified at the first in a series of congressional hearings on music licensing. We have not modeled meaningful changes to Pandora’s cost structure going forward, as we expect Congress to favor musicians’ rights, and expect any legislation to address the inequity of free distribution rights for terrestrial radio before addressing the inequity between rates paid by Internet radio distributors and digital radio distributors that pay lower rates than Pandora. Should the rates drop for Internet radio distributors, Pandora would benefit immensely, but the lower rates may attract new entrants to internet radio…

We think that unsubstantiated rumors of Apple’s entry into Internet radio may have merit. Apple’s (NASDAQ:AAPL) purported entry will occur in early 2013, according to news reports from Bloomberg and the Wall Street Journal. We think Apple could take as much as 15% share from Pandora over time, should it launch a similar service.

Reiterating our OUTPERFORM rating, but lowering our 12-month price target to $10 from $14 on more conservative valuation given the long-term risk of increased competition. Pandora’s superior growth outlook is partially offset by the potential for increased competition, with an entry by Apple likely to materially impact Pandora’s market share. Our price target reflects a multiple of 25x likely CY:15 EPS of $0.40.

Michael Pachter is an analyst at Wedbush Securities. 

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