Analyst: Here’s Why I’m Downgrading Pandora Media

We also expect an update on the status of royalty rates early in the year. At an investor conference earlier this month, Pandora’s CEO stated that he expected the Internet and Radio Fairness Act to likely be introduced in some form in the new session of Congress. We do not expect any near-term benefit to Pandora from the legislative process, as negotiations are likely to be drawn out over many months. We believe that a final decision will keep the interests of performing artists first, and see a low probability that Pandora’s rates will be lowered meaningfully. With that said, we expect Pandora’s rates to remain stable for several years.

We remain optimistic about Q4. There may be slight upside to our estimates for revenue of $125 million and EPS of $(0.06), compared to guidance of $120 – 123 million and $(0.09) – (0.06), and consensus of $122 million and $(0.05). Listener hours through December tracked roughly in line with our expectations, and management was likely being overly conservative about the fiscal cliff impact.

Maintaining FY:13 estimates for revenue of $427 million and EPS of $(0.09).

Michael Pachter is an analyst at Wedbush Securities.

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