The Sell-Side Reviews Pandora's Q2

After Tuesday’s second-quarter earnings report showcased thriving paid subscriptions and revenue, Pandora Music, Inc. P shares rose 8 percent in aftermarket trading.

The Analysts

Bank Of America Merrill Lynch analyst Nat Schindler reiterated both an Underperform rating and a $5.60 price target.
William Blair analyst Ralph Schackart maintained an Outperform rating.
Credit Suisse analyst Stephen Ju maintained a Neutral rating and increased the price target from $6 to $7.
Susquehanna analyst Shyam Patil maintained a Neutral rating and increased the price target from $7 to $8.
RBC Capital Markets analyst Mark S.F. Mahaney upgraded Pandora from Sector Perform to Outperform and raised the price target from $6 to $10.

The Thesis

Despite Pandora’s ability to beat Q2 revenue expectations, Bank Of America is concerned with the platform's long-term profitability potential due to falling engagement and strong competition.

“We continue to struggle to find a path to profitability for Pandora," Schindler said. "Reigniting user/engagement growth at this stage is an uphill battle, and without user growth, Pandora has little leverage to improve the business and close the negative EBITDA gap with higher gross profit."

Due to the year-over-year improvements in new users, recapture and churn, William Blair's Schackart considers Pandora to be in early stages of success.

“In terms of marketing, management has seen positive signs from its recent plan to shift towards performance-based marketing. In the third quarter, management guides marketing expenses 'at least $10 million more' compared with the year-ago quarter. Further, the marketing spending will be almost fully allocated to highly targeted, performance-based digital advertising (much different than a year ago)."

Credit Suisse's Ju highlights the closing of the AdsWizz acquisition and its effect on advertising revenue. This revenue should be coming in at higher margins as the company gains exposure to more advertisers, he said.

“The confluence of these factors positions Pandora to start playing offense as it announced its intent to allocate additional marketing dollars toward user acquisition,” the analyst said. “As previously noted, we are only at the very beginning of what can result in a wide range of outcomes for both the subscription as well as the advertising business, and the [second-quarter] results provide a good glimpse of the positive estimate revisions likely to come.”

Susquehanna's Patil reiterated that Pandora’s encouraging results show distinct progress due to increased performance and new partnerships. “For subscribers, P is excited about its recent partnerships (AT&T, Snap) and family plans, which should drive stronger net adds going forward, partially offset by changes in grace periods."

RBC's Mahaney said that — due to new management — Pandora has taken numerous steps to improve company fundamentals, such as initiating Pandora Premium Access, introducing family and student plans and launching an audio program offering.

"Pandora rapidly increased its share of total U.S. radio listener hours to 10 percent, but captures only a fraction of radio advertising spend," the analyst said. "The buildout of Pandora’s local salesforce as well as integration into leading radio ad-buying platforms should help to accelerate this monetization effort."

Price Action

Pandora shares were trading up 16.77 percent to $7.87 at the time of publication Thursday.

Morgan Stanley: Pandora's Path To Revenue Growth Isn't Guaranteed

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