Pandora Media Earnings Analysis: Radio Market Share on the Rise

Pandora Media (NYSE:P) revenue was $75 million, compared with our and consensus estimates of $71 million, and guidance of $69.5 – 72.5 million. Advertising revenue was $66 million vs. our $62 million estimate. Non-GAAP EPS was $0.02, compared with our and consensus estimates of $(0.01), and guidance of $(0.02) – 0.00.

The company increased FY:12 guidance for revenue to $273 – 277 million from $270 – 275 million and for EPS, to $(0.05) – (0.02) from $(0.07) – (0.05).

We are raising our FY:12 estimates for revenue to $276 million from $272 million, and for EPS to $(0.02) from $(0.06) to reflect the Q3 beat. We are maintaining our FY:13 estimates for revenue of $378 million and EPS of $0.04.

Pandora continues to gain market share. Its share of Internet radio listening increased to 66% (from 60% last quarter).  We expect Pandora’s leadership position to allow it to claim a disproportionate share of Internet radio advertising. In addition, Pandora now has a 4.3% market share of all U.S. radio listening, up from 2.1% last year, making it one of the largest radio stations in most markets.

The company is well-positioned to benefit from the rapid growth of mobile advertising due to penetration on mobile devices. Listener hours on mobile devices accounted for ≈ 70% of total hours for Q3, up from 50.5% for FY:11.

We expect the removal of the 40-hour-per-month free listening limit to result in increased advertising revenue. In September, Pandora (NYSE:P) eliminated the $1 overage fee imposed on free subscribers who listened to over 40 hours of music in a given month. The repeal should allow Pandora to more fully realize the advertising revenue potential from its most dedicated users.

Near-term profitability is not the company’s primary concern, potentially negatively impacting valuation. Pandora remains focused on growing its active user base and listener hours through increased spending on sales and marketing, and product development. Although investors tend to have a short-term outlook when evaluating stocks, we believe management is correct in focusing on more meaningful earnings growth long-term, as the stock should eventually receive increased EPS estimates at higher P/E multiples due to a steeper growth curve.

Maintaining our OUTPERFORM rating and 12-month price target of $14, which reflects 14x normalized EPS of $1.00. Pandora’s peers have an average CY:12 P/E multiple of 14x. Given Pandora’s better growth outlook, we are assigning a 17x multiple to CY:14 EPS of $1.00, discounted back to CY:12 at a 10% discount rate.

Michael Pachter is an analyst at Wedbush Morgan.

Here are stocks related to Pandora for your watchlist: Sirius XM Radio Inc. (NASDAQ:SIRI), Linkedin Corporation (NYSE:LNKD), Google Inc. (NASDAQ:GOOG), Apple Inc. (NASDAQ:AAPL).

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