SunTrust's Bob Peck Downgrades Pandora To Neutral; Still Sees Long-Term Opportunity

• Pandora Media Inc P shares have gained 6 percent in the last one month.
• SunTrust Robinson Humphrey’s Robert S. Peck downgraded the rating on the company from Buy to Neutral, while reducing the price target from $18 to $15.
• Increasing investment to pursue new TAMs is likely to weigh on the company’s near-term profits, Peck stated.

While the CRB ruling seems to be “modestly positive,” the decision would result in increased content costs for Pandora in the near term, analyst Robert Peck said. He added, however, that the economics would improve in the longer term.

With this, the stage has been set for Pandora to “enter into direct deals with the labels, which could open new TAMs in interactive and international services, likely in 2017,” the analyst wrote.

Higher CRB rates could result in an additional $40M impact each in 2016 and 2017. “While our revenue ests. increase and are in line with Street consensus, our revised EBITDA projections of $41M for 2016 and $103M for 2017 are materially below the Street,” the SunTrust report noted.

Peck believes that the new initiatives could substantially boost shareholder value in the long term. He pointed out, however, that the story could “remain in a flux” in 2016 and beyond on account of:

1. Uncertain economics for interactive
2. Entrenched competition abroad with unclear differentiation
3. Immediate costs/losses from Rdio and Ticketfly

“Given the uncertainty and upcoming investments, we believe it will be difficult for P to outperform until visibility improves,” Peck commented.