Pandora Media Inc (NYSE:P) and Amazon.com, Inc. (NASDAQ:AMZN) both face fierce competition in their respective segments, but Stifel analysts think one will fare better than the other. In two reports both dated Aug. 12, 2014, Stifel analysts Scott W. Devitt, John Egbert and Alex Chavdaroff weighed in on both companies.
Pandora Media’s position is strong
The analysts resumed coverage of Pandora with a Buy rating and $34 per share price target. They believe the streaming radio service provider has created a meaningful disruption in the radio industry and grabbed a “commanding share” of Internet radio. They note that some investors are still concerned about possible competition from on-demand streaming services.
Nonetheless, they think the company has been able to successfully keep interactive services at bay because it offers a “lower friction to usage” and also “broader use cases.” They also think that greater distribution through integration in cars, plus more expansion overseas, will help Pandora Media continue growing its number of listeners and listening hours in the medium to long term. This will help the company make its ad business even bigger over time.
Pandora Media stands alone
The Stifel analysts believe that the company is the only digital platform that is ready to penetrate the $16 billion radio advertising industry. They say Pandora’s ad business has “turned a corner” because it has been steadily building out local sales teams to get into the broadcast radio ad business. The local ads business has received a boost through inclusion into media buying plans and also measurements of local and national audiences.
They remain encouraged by the company’s improvements in monetization in the last 12 to 18 months. The Stifel team believes that it will keep increasing its revenue per thousand listener hours because it continues to under-monetize its listening compared to broadcast radio.
Amazon trades margins for market share
The Stifel team is less positive on Amazon, however. They resumed coverage of the ecommerce giant with a Hold rating and $330 per share price target. They believe Amazon is still early in its addressing of the various retail markets and say that its “customer-centric” business approach is built on the believe that the long term is the only thing that matters. As a result, Amazon continues to speed up investment in international ecommerce and digitization, hardware, video, and Amazon Web Services. The result is a limit on how much the company can expand its margins in the near to medium term.
Speaking to Amazon’s competition, the analysts say the company’s returns could be limited by stronger competition in the primary channels it uses for growth. They think the main growth drivers in the next five to ten years will be international ecommerce and web services because North America ecommerce growth will decelerate.
However, they also point out that as Amazon expands internationally, it will face more and more stronger competitors that are already established in those markets. They say this will be that there’s less visibility in the outcome and the possibility that Amazon’s returns will be lower than they have been in the past. They think, as many other investors do as well, that investors are tiring of the “elongated investment cycle” that continues without profitability.