Pandora Media A Buy, Says Canaccord Genuity: PT $35.00

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Pandora Media Inc (NYSE:P) Director Peter Chernin sold shares in the company worth over $16M late last month.

That sale may or may not have anything to do with the Chernin Group’s announcement today that it had acquired majority control in Crunchyroll Inc., which lets customers view free videos as well as on a subscription basis. Financial terms of the acquisition were not disclosed.

Could it be that Chernin thinks video has better prospects over radio?

Core strength of Pandora

One of the core strengths of Pandora Media Inc (NYSE:P) is its ability to create playlists based on algorithms, enabling customers to quickly listen to personally favored music. Apple Inc. (NASDAQ:AAPL) could bring a new twist to that with its acquisition yesterday of social-media analytics firm Topsy Labs Inc for over $200M. According to an article in the Wall Street Journal, “there may be opportunities to link Topsy’s technology with Apple Inc. (NASDAQ:AAPL)’s iTunes Radio, an online-streaming-music competitor to services from Pandora Media Inc. and Spotify AB. One possible scenario would use data from Topsy to alert listeners to songs that are trending or artists being discussed on Twitter.” Who needs algorithms when there’s Twitter?

But Apple Inc. (NASDAQ:AAPL)’s much-vaunted launch of iTunes Radio, thought to be a Pandora-killer, has in fact worked in favor of the latter. According to a report in Bloomberg, Pandora has managed to increase its market share from 7.77% to 8.06% post-Apple’s radio launch.  At least one analyst thinks Apple Inc. (NASDAQ:AAPL) could acquire Pandora Media Inc (NYSE:P).

Nevertheless, there is no doubt that serious competition is nipping at Pandora’s heels, considering Apple Inc. (NASDAQ:AAPL) quickly grabbed 20 million customers.

Canaccord Genuity analysts Michael Graham and Maria Ripps have a Buy rating on Pandora, however, and a 12-month price target of $35.00. The stock closed yesterday at $28.25.

Pandora’s advertising load

The analysts continued their study of Pandora’s advertising load during November. “Our November audio advertising load sampling indicates continued stability. We observed an average of 5.4 audio ad spots per hour in November, a slight increase from October’s 5.3 audio spots and September’s 5.0 spots. The local mix remained healthy, despite a stronger showing from large national retailers in the sampling this month. The quality of display advertising also improved significantly, potentially implying higher pricing power for the segment,” they said.

According to their financial projections, Pandora Media Inc (NYSE:P) will earn its first operating profit in June 2014. EPS (GAAP) projections are as follows:

2013: (-$0.25)

2014: $0.03

2015: $0.37

2016: $0.70

2017: $0.95

The analysts acknowledge that Pandora Media Inc (NYSE:P) faces risks such as unforeseen technological factors that could dissuade advertisers from using the company’s platform, the challenge of advertising on mobiles which are increasingly being used for music, potential for rising costs of content, and competition from iTunes, Google Inc (NASDAQ:GOOG) Music, Rhapsody and Spotify.

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