With All The Pandora Drama, What Should Investors Do?

• The court’s decision to allow Pandora’s deal with Merlin to be admitted as evidence in rate-setting proceedings was a positive for Pandora.
• FBR believes that the language in the decision means that Pandora still has an uphill battle.
• FBR recommends investors stay away from Pandora’s stock at current prices.

Pandora Media Inc P shares jumped on Monday when the company announced a favorable decision from the U.S. Copyright Office regarding its “Web IV” royalty rate-setting case. The court ruled that Pandora’s 2014 deal with Merlin can be used as a benchmark for royalties in the proceedings, but a new report by FBR & Co analyst Barton Crockett cautions shareholders not to get ahead of themselves when it comes to the case’s outcome.

Background

Last year, the Copyright Royalty Board began proceedings to determine webcasting rates and terms based on the licenses of thousands of digital radio services, including Pandora. Royalty collector SoundExchange is calling for a royalty rate hike that Pandora believes would exceed sustainable levels for the industry.

The court ruled this week that Pandora’s deal with Merlin is admissible as evidence in determining a benchmark royalty rate. While the terms of the deal are not public, FBR analyst Ignatius Njoku recently wrote that “we believe in exchange for surfacing more Merlin artists on Pandora stations, Pandora received a lower rate per song than the current pure-play rate of $0.0014.”

Related Link: Macquarie Boosts Pandora Target On 'Enormous Potential' Of $0.99 Daily Pass

Mixed language

Crockett cautions traders about reading too much into the court’s decision and points out some language that the court used that indicates that the Merlin deal will likely only be given limited consideration.

Copyright Registrar Marie Pallante writes that Copyright Royalty Judges “are entitled to weigh the value of any such evidence in light of the overall circumstances of the marketplace.”

Outlook

According to Crockett, Pandora is up against tremendous pressure from record labels for higher rates, and it is trying to navigate these rate proceedings perfectly to maintain something close to the status quo.

FBR has an Underperform rating on Pandora and a $11 target for the stock. The firm prefers Outperform-rated Sirius XM Holdings Inc SIRI.

Disclosure: The author holds no position in the stocks mentioned.