Despite the new threats from Spotify and Turntable.fm, J.P. Morgan analyst Doug Anmuth is feeling bullish about Pandora.He initiated coverage on the stock this morning with an “overweight” rating and a $22 price target for the end of the year. His reasons for optimism:
- Transforming traditional radio. We believe Pandora is changing the way people enjoy music through customised stations and music discovery. Though Pandora has a ~60% share of US Internet radio listening time, it represents less than 4% of total US radio listening hours.
- Multiple monetization levers. We believe there is significant opportunity for Pandora to improve the monetization of its listener hours. Because mobile advertising is at a very early stage of development, Pandora’s monetization of an hour of mobile listening is substantially below the level of monetization it realises from the web, essentially creating a negative near-term mix-shift as mobile accounts for ~60% of total Pandora listening. However, as the mobile ad market develops, we believe Pandora will benefit from higher premium sell-through rates, increasing CPMs, and modestly higher ad placements per hour. We estimate Pandora’s mobile revenue per thousand listener hours (RPM) will increase from less than $19 this year to ~$48 by FY17.
- Margins should improve as monetization picks up and listener hours moderate. With smartphone penetration at ~30% and the US mobile ad market totaling around $1.2 billion in 2011, it is still very early in mobile advertising, and Pandora is generating a large amount of inventory. But we expect monetization to improve and hours growth to moderate over the next few years, driving more meaningful profitability in FY14 and FY15. We project Pandora can move from breakeven EBITDA in FY12 to a 13.5% margin in FY17.
- Ubiquitous distribution and Music Genome Project key advantages. Pandora is available through a variety of distribution channels including traditional computers, mobile/smartphones, consumer electronic devices and automotive sound systems. Importantly, Pandora is among the top five most used apps across all major smartphone platforms in the US. We believe the Music Genome Project also creates competitive barriers and provides Pandora with valuable information about user preferences.