Pandora Media Inc (P) Q4 Continued Growth Augers Well For 2014

PandoraBy w:Pandora [Public domain], via Wikimedia Commons

Michael Graham of Canaccord Genuity Research looks to Pandora Media Inc (NYSE:P)’s strong Q4 results, changing the model slightly on new data and maintaining a Buy recommendation.

Pandora Media Inc (NYSE:P)’s Q4 results were solid, with ad revenue and subscription revenue showing 40% and 150% y/y growth. RPMs are expanding more slowly than we had forecast, but we find it hard to argue with 42% y/y mobile ad RPM expansion. We are encouraged by CEO McAndrews’ three strategic priorities (listener hours, monetization, and content costs). We note that the plan to market for new listeners (unprecedented at Pandora) likely signals increased confidence in the company’s ability to sell more advertising at a faster pace. While estimates may not be going up fast enough for the most enthusiastic bulls, we continue to expect solid, steady growth from this subscription-like model.

Key points from Pandora’s earnings

  • Bullish: Q1 guidance implies no deceleration in ad revenue, and 2014 guidance is likely conservative; mobile ad RPM of $36.20, while below our $37 estimate, expanded by 42% y/y; leverage on content costs led to a 330 bps sequential gross margin expansion.
  • Bearish: January active listeners down 3.7% sequentially, greater than last Q1’s 2.2% decline; faster ramp in sales hiring and marketing spend suppresses 2014 margin expansion.
  • Estimate Changes: We are making a few modest adjustments to our model. Our FY14 and FY15 revenue and non-GAAP EPS estimates go to $887.4M/$0.17 and $1,148.9M/$0.59 from $887.0M/$0.24 and $1,113.5M/$0.59.

Pandora’s valuation

Our price target for Pandora Media Inc (NYSE:P) remains unchanged at $43, and is based on 45x our FY18 non-GAAP EPS estimate of $1.55, discounted to present at 10.5%. We maintain our BUY recommendation.

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