Bob Peck Looks Beyond Pandora's Current Quarter, Raises EPS Estimates

In a report published Thursday, SunTrust Robinson Humphrey analyst Bob Peck maintained a Buy rating and price target of $25 on Pandora Media Inc P. The analyst believes that the recent sell-off suggests that the stock is discounting for the Q2 miss and the lowering of the full year guidance.

Triton data indicates that listener hours in Q2 were marginally below the consensus forecast. The analyst believes that Apple Music (Apple, Inc. AAPL) could lead to a less than 5 percent headwind for Pandora's listener hours in Q3, although a recovery is expected in Q4.

In addition, SunTrust's proprietary survey showed that competitors, such as Spotify and YouTube, were gaining penetration/engagement. According to analyst Peck, "Spotify freemium remains biggest competitive headwind to P."

The analyst believes that the items to watch for include "1) if labels shutter Spotify freemium in favor of 3-month trial, 2) if labels pull videos from YouTube per press report."

However, the analyst also believes that display programmatic could drive single-digit revenue growth in 2016, with audio programmatic expected to add 400 bps to Pandora's margins in the longer term.

According to the SunTrust report, "We continue to believe the CRB will set rates that will be deemed favorable/satisfactory by Pandora and investors." The ruling is expected on December 15.

The listener hour estimates for Q2, Q3 and Q4 have been lowered, along with the full year revenue estimate. The EPS estimate for the full year has, however, been raised due to lower tax in Q2/Q3.