Albert Fried's Rich Tullo Upgrades Pandora To Overweight, Expects Ad 'Bump' Soon

In a report published Friday, Albert Fried & Company analyst Rich Tullo upgraded shares of

to Overweight from Market Perform with an unchanged $19 price target after the company posted a "solid" second quarter print. According to Tullo, Pandora's second quarter listener hours of 5.3 billion was "very strong" despite a "disappointing" monthly listener user base of 79.2 million. Looking forward, the analyst is expecting the company to post 82 million monthly users as the second quarter's metric was affected by seasonality given the end of the college year. Tullo continued that the "more important" metric, local ads, rose 67 percent year over year and supports the company's business plan goals for 80 percent sales force productivity gains. The analyst added that as large advertisers over time buy big blocks of ads which they will "slice and dice," these future deals will prove to be "positive data points" for Pandora's stock. Commenting on one of the stock's major overhang, the upcoming decision on digital royalty rates by the Copyright Royalty Board, Tullo argued that artists will get a rate escalation, but the "Armageddon scenario" of 30 to 40 micro pennies is "off the table." While higher content costs is a risk for Pandora, the company can mitigate the higher expenses as it increases its ad load which will result in stabilizing gross margins over time. Looking forward, Tullo boosted his third quarter revenue estimate to $308 million from $297 million (which is actually short of the company's own guidance of $312 million) as Pandora may face headwinds from the launch of Apple Radio. For the full fiscal year, the analyst is raised his revenue estimate to $1.2 billion from $1.1 billion and is now expecting the company to earn an operating income of $32 million after previously estimating a loss of $34 million as the company's margins will improve from 38 percent in the first quarter to roughly 60 percent by the fourth quarter as it benefits from increased revenue from programmatic advertising. Bottom line, Pandora's subscriptions are "holding up better" than Tullo previously modeled. The company also has "real" operating leverage, and unlike

, Pandora's incremental subscriptions are profitable.