Pandora Set to Capture Growth from Car Integrations

Source: Pandora

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.  

Pandora (NYSE:P) will report second-quarter 2014 (June) results after the close on Thursday and hold a call at 2 p.m. Pacific (dial-in: 877-355-0067, online: investor.pandora.com).

We expect Pandora to meet or exceed our Q2 estimates. We expect revenue of $220 million and EPS of 4 cents, versus consensus of $219 million and 3 cents, and guidance of $213 million-$218 million and 0 cents-3 cents. May was the final month that Pandora disclosed monthly audience metrics. Through the first two months of the quarter, listener hours totaled 3.43 billion, meaning that Pandora was on track to deliver 5.15 billion-5.2 billion hours for the quarter, above our estimate of 5.05 billion. Potentially stronger-than-expected listener hours, a greater mix of local ads, and car integrations should allow Pandora to at least meet our expectations.

We expect management to pass through any beat to FY guidance, as it did in Q1. FY:14 guidance is for revenue of $880 million-$900 million and EPS of 14 cents-18 cents.

Car integrations should be a source of hours and revenue growth in coming years. Roughly one-third of the new cars sold in the U.S. have Pandora integrations, with total integrations increasing to 5 million in January 2014 from 1 million a year earlier. In-car listening allows Pandora to capture a captive audience with targeting by demographic that results in higher ad rates.

Local ad mix represents a revenue growth opportunity. According to Pandora, about two-thirds of the $15 billion domestic annual radio ad market comes from local ads. In Q1:14, local represented 20 percent of Pandora’s ads, up from 10 percent a year ago. Pandora does not expect to increase the number of audio ads delivered per hour (six) in 2014. Instead, top-line growth will come from the higher rates that local ads command (rates are 50-200 percent higher for local than for national), strong local sales teams across the country, and increased demand resulting from targeting.

We do not view Amazon’s (NASDAQ:AMZN) Prime Music as a competitive threat to Pandora. We continue to believe that Pandora’s Music Genome Project and proprietary playlist generating algorithms separate its offering from those of its competitors.

Maintaining our OUTPERFORM rating and 12-month price target of $35. We assign a 15x multiple to our $7 operating profit per user per year, and arrive at a value per user of $100. At $100 per user, 75.3 million users at year-end, cash and investments of $446 million, and a share count of 200 million, we arrive at our $35 price target, reflecting continued-strong user growth.

Michael Pachter is an analyst at Wedbush Securities. 

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