New analyst rates Pandora Media a buy


Aaron Kessler at Raymond James & Associates is the latest to join the ranks of Wall Street equity analysts following Pandora Media – some 19 now, according to Thompson/First Call. Kessler put a target price of $15 on the stock, which is above the recent trading price, but still below last year’s IPO price.

Kessler initiated coverage of Pandora with an “Outperform” (buy) rating, saying it has a strong leadership position in the Internet radio market and a significant opportunity to increase monetization, particularly for mobile usage. He noted that Pandora currently generated about $35 per 1,000 listening hours – about half of the $73 calculated for broadcast radio. “We believe the biggest opportunity is for Pandora to increase its mobile audio ad load which we expect Pandora to address through aggressive hiring of a local ad force.

The analyst projects that Pandora’s revenues will continue to grow, from an estimated $277 million from the fiscal year ending January 31, 2012 to $680 million for the fiscal year ending January 31, 2014. He sees earnings per share growing to eight cents on a non-GAAP basis, but still a loss of three cents by GAAP standards.

The Raymond James analyst acknowledges that music royalties pose a risk. “Content costs totaled 50.4% of total revenue in fiscal Q3 and SoundExchange rates are set to increase annually through 2015,” the initial research reported noted. Thus, he expects those content costs to rise from 50% in the fiscal year ended 1/31/11 to 53% in the current fiscal year and to 55% in the next one.

“Pandora’s long-term model calls for approximately 40% cost of revenue, which we believe assumes current negotiated rates through calendar year 2015 extend into the future. We believe that there is potential for rates to decline for the 2016-2020 timeframe given the difficulty for the majority of Internet radio models to make a profit under the current pricing environment,” Kessler wrote.

RBR-TVBR observation: Kessler’s comment on future music royalty rates assumes that the record labels care whether Pandora or any other Internet audio service succeeds financially. We have seen nothing to date to indicate that is the case. So, unless there’s heavy pressure from Congress (or even new legislation), we would foresee the labels seeking even higher royalty rates, not lower ones.