DEEP ANALYSIS: Pandora Earnings Sneak Peek

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

Pandora (NYSE:P) will report its fiscal Q2:13 (ending July) results after market close on Wednesday, August 29, and hold a conference call at 2:00pm PT (877-355-0067, webcast:

We expect Q2 results above the high end of guidance. We expect revenue above our estimate of $102 million, compared with consensus of $101 million, and guidance of $99 – 101 million. We expect the top-line beat to be driven by slightly better-than-expected CPMs that reflect a stronger advertising presence (including in local markets) and continued market share gains. In addition, we expect EPS above our estimate of $(0.01), compared with consensus of $(0.03), and guidance of $(0.05) – (0.03). The EPS beat will be driven by top-line growth and cost control. We note that Q1 results were significantly above guidance.

We expect management to raise FY:13 guidance for revenue of $420 – 427 million and EPS of $(0.11) – (0.07). However, we do not expect the beat to be fully passed through. After exceeding the high-end of guidance in two of three quarters as a public company, and after failing to fully pass through the Q1 EPS beat, we expect management to once again be conservative.

Well-positioned to benefit from mobile advertising growth. Pandora listener hours on mobile devices accounted for ≈ 70% of total hours in Q1. We believe the mobile advertising market will see strong long-term growth as smartphones and tablets increase in popularity from better functionality and pricing. Pandora is wellpositioned to gain a disproportionate share of this growth as a must-have app.

We believe the lack of meaningful earnings has negatively impacted valuation.  We believe management is correct in focusing on more meaningful earnings growth in the long-term. However, we believe that investors will lose patience if Pandora’s earnings growth lags its advertising revenue growth significantly in 2H:13.

Maintaining our OUTPERFORM rating and 12-month price target of $14, which reflects 14x normalized EPS of $1.00. Given Pandora’s superior growth outlook to its peers, 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 Securities.