Canaccord Genuity Analyst Michael Graham on Pandora Media Inc (NYSE:P)’s ASCAP ruling and other positives?.

Pandora

Pandora: Investment recommendation

Over the past 30 days, Pandora Media Inc (NYSE:P) stock is down ~7% relative to a flat S&P 500. We believe this is at least partly related to a negative reaction to the listener growth deceleration reflected in the February metrics. We note these metrics were consistent with our model. While it is undeniable that slowing listener growth is placing a greater burden on monetization going forward, we find the stock price weakness at odds with what we view as several positive developments recently.

Pandora: Investment highlights

  • ASCAP ruling appears to be a clear victory — While the official decision was issued under seal, we believe the ruling will ultimately reveal two material positives (lower rate and denial of “selective withdrawal” for Pandora Media Inc (NYSE:P)’s position with ASCAP and also with BMI early next year).
  • Listener outlook is likely better than the worst fears — Listener growth is indeed slowing, but engagement in February was up sequentially, and we see a high likelihood of a spring re-acceleration in listener growth from 1) easier comps in Q2 related to the 40-hour cap; 2) impending win-back campaign.
  • Monetization outlook is encouraging — Our proprietary ad load survey suggests Q1 is likely to show better-than-historical seasonality in advertising RPM.

Valuation

We maintain our BUY recommendation and $43 price target. Our price target is based on 45x our FY18 non-GAAP EPS estimate of $1.55, discounted to present at 10.5%.