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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 Q4:13 (ending January) results after market close on Thursday, March 7, and hold a conference call at 2:00pm PT (877-355-0067, webcast: http://investor.pandora.com).
We expect Q4 results at or above the high end of guidance. Our current estimates are for revenue of $125 million, compared to consensus of $123 million and guidance of $120 – 123 million, and for EPS of $(0.06), compared to consensus of $(0.05) and guidance of $(0.09) – (0.06). We believe management conservatism about the impact of the fiscal cliff on advertiser spending was misplaced. Our conviction about Q4 is further strengthened by listener hour growth, which tracked in line with our expectations.
Mobile listening cap may portend weak FY:14 guidance. Last week, Pandora announced the implementation of a 40-hour-per-month cap on free mobile listening in the U.S. in March intended to address rising per-track royalty rates. The cap indicates to us that mobile advertising growth is once again lagging behind royalty payment growth. We believe management anticipated this imbalance for Q4 due to the fiscal cliff, but weakness in February was largely unexpected. If advertising has slowed, management may guide to FY:14 EPS well below break-even (consensus is for a loss of $0.01); if so, investors may be frustrated with sluggish monetization and concerns around potential competitive product launches, resulting in a sell-off.
We do not see significant room for share price appreciation beyond current levels due to a lack of near-term profitability and continuing uncertainty about competition. Pandora shares have traded up significantly in value since mid-November, despite lowered FY:13 guidance in December, with many headwinds remaining. We expect Apple to announce an online music service, although recent commentary about Google’s prospective offering appears to indicate that the company will offer only a subscription on-demand music service similar to Spotify. Competition may spook investors, shrinking Pandora’s multiple.
Reiterating our NEUTRAL rating and 12-month price target of $11.50. Our price target reflects a multiple of 23x likely CY:15 EPS of $0.50. Pandora’s superior growth outlook is partially offset by the potential for increased competition, with an entry by Apple (NASDAQ:AAPL) or Google (NASDAQ:GOOG) likely to materially impact Pandora’s market share.
Michael Pachter is an analyst at Wedbush Securities.
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