Veteran media analyst Anthony DiClemente at Barclays Capital has added Pandora Media to his coverage universe. He is not very impressed by the numbers for the Internet music streaming company. And while the stock is trading well below last year’s IPO price, he tells clients that “valuation is stretched.”
DiClemente launched coverage of Pandora with a “3-Underweight” (sell) rating and a target price of $8.00. The stock closed Wednesday (4/4) at $10.05. The IPO price last June 14 was $16.00.
“Why 3-Underweight? Despite its strong growth in both listeners and hours, Pandora’s difficulty monetizing mobile at the same level as PCs in the face of a rapid mix shift towards the former, coupled with variable and increasing content acquisition costs, could make achieving profitability difficult for the foreseeable future. Our $8 price target is based on ~3x our 2013 estimated [enterprise value] EV/Sales,” DiClemente explained.
The analyst noted that “content costs are very expensive,” amounting to 54.2% of revenue in the most recent fiscal year. DiClemente added that those music royalties are “variable based on listener hours, removing Pandora’s operating leverage, and will continue to rise on a per-song basis through calendar year 2015. This paired with extremely robust listener hour growth means Pandora is generating much more inventory (which it pays for variably) than it can offset with incremental revenue, which is why it loses money.”
Not that DiClemente dislikes the service – just the financials. “We believe that Pandora is clearly a disruptive player as it has a pole position in Internet radio and the broader market,” he wrote. But he just doesn’t expect to see Pandora reach profitability until fiscal year 2016 (February 2015 through January 2016) at the earliest.