|BTIG Says Sell, $5.50 Target|
By Tiernan Ray
Richard Greenfield with BTIG Research today initiated coverage of Pandora Media (P), owner of the Pandora Internet Radio service, with a Sell rating and a $5.50 price target, implying downside of about two thirds from a recent price of $15.22.
Pandora stock is down about 13% today after a 9% first-day bounce yesterday.
“Pandora has been the “survivor” in Internet radio,” writes Greenfield, “but we believe digital music will have a wider array of competitors over the coming year.” Greenfield counts among those competitors Spotify and Turntable.fm.
Revenue‘s going to rise dramatically, he writes, from $264 million to $1.1 billion by 2015, as registered users soar from perhaps 82 million to 193 million.
But it will lose money on a net basis this year through 2013, before turning in positive EPS in 2014, and perhaps just $15 million in Ebitda in 2014 and $81 million in Ebitda by 2015.
Pandora’s business model includes music-licensing fees that are fixed, but that also rise each year. As more and more use of the service goes mobile, and away for the desktop, the company is facing lower CPMs for advertising, because audio-only ads are not as high a rate as the display ads the company can get on the desktop, he writes.
The business doesn’t scale, in his view:
While Pandora is creating a large active user base, its reach/frequency continues to pale in comparison to terrestrial radio, as does its profitability. Pandora’s fundamental problem is that active users and listening hours are growing rapidly, but those listener hours have fixed (and annually escalating) royalty costs per streaming hour (fees to music labels).
Greenfield’s $5.50 target is based on a multiple of 11.3 times 2015 Ebitda, or 17 times free cash flow that year. By contrast, investors betting P can rise to $21 in coming years are valuing the stock at 49 times that 2015 figure, which he thinks is excessive.
Pandora shares today closed down $4.16, or 24%, at $13.26. The shares went on to fall another 5% in late trading, to $12.65.