Gilford's Jim Boyle Looks At Pandora's Stock Value
July 8, 2011 at 3:36 AM (PT)
GILFORD SECURITIES analyst JAMES B. BOYLE has released his look at the value of PANDORA MEDIA INC. now that the company has gone public.
* Lofty Valuation & On The Come: P is 36.8x FY'14E EBITDA, a lofty multiple and fairly far out. Our $14 target is a 5.0x FY‘13E Price/ Sales, a modest discount to GOOGLE’s consensus CY'12E P/S. P is a pricey stock.
* High User Growth Cuts 2 Ways: PANDORA is blessed and cursed with remarkable growth. Active users' robust double-digit growth boosts P's ad surge; however, it also boosts its stratospheric royalty fees. Last FY, active users soared 81%, listener hours zoomed 111%, and royalty fees were also up 111%. Cautious investors, impressed by growth, still wonder about margins.
* PANDORA Afflicted By High Royalty Fee: PANDORA paid 50% of its rev. last FY and 57% in FQ1 as royalty fee to music labels. Dramatically higher levels than what terrestrial radio & satellite radio pay. Royalty situation goes to CY'15; subsequently, there is uncertainty for P's major cost item.
* PANDORA Present Position Plusses: The premiere Internet radio service at 58% share of listening among Top 20 music services. At 34MM active users P has a big lead. Yet, even web leaders can fade, i.e. MYSPACE.
* Rein In Hours & Add Commercial Minutes: P could accelerate margin expansion by increasing its minimalist commercial unit load of 1 min./hr. This would temper royalty fee impact while still driving ad rev. growth. Over-the-air radio averages 16+ mins./hr. Bumping up P’s minimal commercial load would still be more attractive to listeners and ad clients. P having fewer ads is 4th best reason by P users; so important, not mandatory.
* PANDORA Aided By Over-The-Air Radio Comparison: Ironically, P is helped by listeners and ad clients comparing it to its much larger, older sibling, terrestrial radio. P has substantially less ad clutter, lower ad prices. P is rapidly growing its universe and audience. P is more customizable and functionality, such as skipping songs less liked. P has dual-revenues, with 87% advtg. P is internet and mobile devices -- both are surging.
* Risks: Incl. existing/ new competition, royalty fee status, technology, economy, higher mobile access cost, and manages its high rev./cost growth. Risks to our sell rating incl. better than expected results or a take-out offer.
For details, contact GILFORD SECURITIES Sr. Analyst JIM BOYLE at (212) 940-9238 or | email@example.com.