MKM Sees Pandora Fundamentals Remaining Weak For Another 2 Quarters

MKM Partners’ Rob Sanderson expects Pandora Media Inc P's fundamentals to remain weak at least for another two quarters.

Sanderson maintains a Neutral rating on the company, while raising the price target from $11.50 to $13.00.

Stock Concerns

“Competitiveness and licensing terms of an on-demand service are unknown. This is of make-or-break importance for the stock to remain interesting as a growth asset,” the analyst cautioned.

Although stable content costs are expected to drive gross margin improvement in 2H, spending is also expected to remain high. The monetization of on-demand development initiatives are also not expected to begin until 2017.

Related Link: Pandora Spikes To High Of $13.96 On Volume

“We do not see relief to audience share loss until the company can offer on-demand services. We expect monetization improvements will continue, but this is capped without usage growth,” Sanderson mentioned, while adding, “Both licensing and product readiness are expected late this year, either of which could slip.”

M&A Speculations

Sanderson believes there could be some merit to the M&A speculations and that these speculations could hold the stock price. On the other hand, there could also be meaningful downside risk if the deal prospects disappear “in the minds of event-driven investors.”

Sanderson sees Liberty Media Group LMCA as a strategic acquirer of Pandora Media, and while the CEO had repeatedly said that he intended to remain independent, there is a split board, and Liberty Media does not have a history of hostile action.

The revenue and non-GAAP EPS for Q3 estimates have been lowered following the disappointing results.

Full ratings data available on Benzinga Pro.