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Alex Cho

Pandora On-Demand Streaming A Major Earnings Catalyst

Pandora remains one of my better performing stock picks. I anticipate incremental momentum in Pandora given the impending launch of an on-demand streaming tier, which is a step-up from Pandora One (which provides ad-free listening, but doesn’t allow music listeners to select specific songs like Spotify).

Here’s what the Wall Street Journal stated in their most recent report:

Pandora is close to reaching deals with major record companies that will allow it to do so both in the U.S. and in new overseas markets, though the agreements haven’t been finalized, these people said. It also had limited its service to the U.S., Australia and New Zealand—the few countries that make music licensing essentially automatic for internet-radio firms, as long as they pay rates mandated by federal judges or licensing collectives.

Pandora’s impending on-demand music service is expected to drive some paid subscriber growth despite competitive threats in the form of Apple and Spotify. Furthermore, I’ve stated on numerous cases that the competitive threats cited by bears were over hyped given the size of the installed base and the number of listeners trained to open the Pandora app as opposed to other music streaming applications.

That being the case, the analysts at PiperJaffray (Stan Meyers and Michael Olson) are anticipating that the new music tier will add 9.2 million paid subscribers, $750 million revenue and $120 million EBITDA by 2019. I think those estimates are fairly conservative, and also realistic given the stagnancy of subscriber growth and the opportunity to launch the service in other international markets.

Of course, the international opportunity is hard to articulate for Pandora, as it operates in North America, Australia and New Zealand given industry standard pricing for music licensing via the Federal Copyright Licensing board. Pandora has to take an additional step to launch the music streaming service via negotiated music licensing agreements with the major labels internationally.

Given the impending timing of an agreement, it’s likely that we’ll witness further subscriber growth across its ad-supported, non-ad, and on-demand tiers. The impact on subscribers should be supportive of management long term outlook, as international expansion and further product segmentation are proven strategies for subscriber/revenue growth.

As such, I continue to reiterate my high conviction buy recommendation on Pandora.

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