Jim Boyle of Gilford Securities is the third Wall Street analyst to initiate official coverage of Pandora Media. His take that the Internet radio company has long-term potential, but is currently a “pricey stock,” makes the tally 2-1 “sell” vs. “buy.”
“Pandora is blessed and cursed with remarkable growth,” Boyle wrote in his initiation report. “Active users’ robust double-digit growth boosts P’s ad surge; however, it also boosts its stratospheric royalty fees. Last fiscal year, active users soared 81%, listener hours zoomed 111%, and royalty fees were also up 111%. Cautious investors, impressed by growth, still wonder about margins.”
The veteran media analyst notes that Pandora is “afflicted” by high royalty fees for the music it streams to listeners. “Pandora paid 50% of its revenue last fiscal year and 57% in fiscal Q1 as royalty fee to music labels. Dramatically higher levels than what terrestrial radio & satellite radio pay,” Boyle wrote. And he notes that the current royalty agreement runs to calendar year 2015, with no certainty after that.
But Boyle, who literally grew up in the radio business, says there is much to like about Pandora. “Ironically, P is helped by listeners and ad clients comparing it to its much larger, older sibling, terrestrial radio. P has substantially less ad clutter, lower ad prices. P is rapidly growing its universe and audience. P is more customizable and functionality, such as skipping songs less liked. P has dual-revenues, with 87% advertising P is internet and mobile devices – both are surging,” he wrote.
Boyle thinks Pandora could improve margins by increasing its minimalist commercial unit load. Upsides include better than expected financial results or a take-out offer. But from where he sits, Pandora is currently trading at 36.8 time 2014 estimated EBITDA – “a lofty multiple and fairly far out.” His target price is $14 – a “sell” since that’s well below where the stock has been trading. Boyle calculated his target as five times fiscal year 2013 estimated price/sales, which is a “modest discount” to the P/S consensus price for Google in calendar year 2012.
The $14 target puts Boyle in the middle of the three analysts who are so far covering Pandora. John Tinker of Maxim Group rates the stock a “buy” with a target price of $23. Richard Greenfield of BTIG Research rates it a “sell” with a target price of $5.50.