Pandora's Earnings Preview

With the Q4 earning of Pandora around the corner, this article will highlight the important issues concerning Pandora’s near future and provide a projection of the upcoming earnings release.

Users and engagement

The disappointing users/hours growth in 3Q - with 76.5M active users and a 1% decline in listening hours of 4.99B - leads to concerns for the upcoming quarter. The competition for user engagement time is becoming increasingly challenging for most Internet companies, with no exception for the streaming music providers.

Pandora can probably maintain as well as increase its share in the growing US streaming radio pie (its share is currently at 78%) and of the stable total US radio pie (currently 9%). These figures are supported by Pandora’s digital marketing campaigns and large promotional events.

The engagement growth would benefit from (investments in) the improvement of both the product and the user experience, such as Pandora’s updated mobile app, which focuses on more intuitive and prominent personalization tools in addition to fresh new visuals.

However, Pandora’s current size results in a slow growth of single-digit Active Users and this is most likely to continue as long as Pandora does not expand into International markets or use car integration more extensively. Both of these options can boost user growth rates tremendously.

Monetization

The next point of concern for Pandora is monetization. I believe that Pandora’s sell through rate (STR) on mobile phones will continue to improve if the company adds more local representatives in various markets. Another improvement of the STR would come with a revision of the ad platform. With better targeting and differentiated ad products, video and sponsored listening, RPMs (Revenue Per 1,000 Hours) are likely to increase.

As a result of increasing demand for their platform and a shift towards local ad units, Pandora can expect more ad pricing benefits. Therefore, Pandora can eventually increase ad-load beyond the current ~6 ads/hr maximum, especially in cars and other connected devices, where the average ad load is even lower.

Since the first quarter of 2013, Pandora has successfully grown its Total Advertising Revenue per Thousand Hours into the double-digits. It can be expected that this growth continues to accelerate, with an estimate of 18% y/y growth in Q4.

More importantly, Pandora will probably grow further and quicker in the more important (and larger) mobile segment. As said before, this is possible since the company expands its local sales force, by increasing local audio ads. These ads can be sold at a premium price.

Industry relations

Once a good format has been established with a determination from the copyright royalty board (CRB), it will be much easier to negotiate potential direct deals with labels. These direct deals could include pushing specific artists in exchange for lower rates and possibly even international rights.

Furthermore, Pandora endeavours to improve relationships with the artist community through Pandora’s AMP (artist marketing platform). AMP provides artists and managers data-driven insights into, for example, stations, tracks, audience, demographics and communication tools, which may help artists to optimize revenue beside royalties, including revenue from concerts.

Valuation

According to consensus, Pandora is valued at an average of a 5.5x Price/Sales Multiple and a 30x EV/EBITDA Multiple. This results in a $35 price target, which gives the opportunity to increase the current price of around $17. These multiples are be justified by Pandora’s opportunity to grow revenue at a 27% CAGR and EBITDA at a 69% CAGR for 2014-2017.

Conclusion

Pandora can clearly be labelled as an overweight or potential outperformer with a $35 price target and a continued sustained profitability. Despite the consistently crowded competitive market, Pandora is expected to perform well. The expansion out of the local ad sales force and integration with mainstream radio ad buying platforms will definitely improve mobile monetization.

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Gelein.huiskes

Gelein Huiskes

Gelein has been interested in the financial world and global economics since high school. For over 3 years he has been a member of a university investment team, of which one year he was the treasurer.

This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions.

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