Analyst Sees Much Larger Pandora Ahead, With Huge Upside

Canaccord Genuity’s Michael Graham and Austin Moldow have laid out a much brighter future for Pandora on the heels of its recent analyst day meeting. The team not only reiterated their Buy rating, but they kept a price target of $28 on the Internet radio provider. If they are correct, Pandora shares could be facing upside of more than 80%.

Their takeaway was that Pandora’s analyst day pointed to the company being much larger in the next five years. They called it refreshingly content rich and signaled that management has broken new ground on key strategic initiatives for the next five years. This included moving past radio into other types of music, new ways to grow the listener base, a sharper focus on international expansion, and also developing a suite of products and services aimed at making Pandora a more effective partner for music makers.

Canaccord Genuity’s report said:

While many of these initiatives will require the cooperation of music labels beyond the statutory CRB-driven royalty rates, we believe they have been long-awaited by investors and should help improve sentiment around the stock. While 2015 may continue to see some investors waiting until CRB rates are known, we find the stock attractive at current levels and believe 2016 is likely to be a breakout year for the company.

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More bullet points included:

• Moving beyond radio: outlining an intent to offer different types of music listening beyond radio and considering launching internationally with a more clear playlist and subscription option to complement Pandora radio.
• International expansion: an ambition to serve hundreds of millions of listeners by 2020 and beyond, and hopes to add about 20 million U.S. listeners and another 100 million outside the country over the next five years.
• Partnering with music makers: in the early days of forging deeper artist and label relationships, and outlined several examples of Pandora serving as a robust promotional tool for artists (including a live-streamed Jack White concert that drove 720,000 station adds in 10 days and 41% week-over-week uplift in record sales).
• Listener growth from fourth quarter: should be repeatable, despite a fourth-quarter revenue miss, and added 5 million sequential active listeners.

As far as Pandora’s financial outlook, the company said its investments will be supported by the company’s flat margin guidance for 2015. This was said to imply about $150 million in incremental operating expense.

Canaccord’s $28 price target is based on some high valuations, compared to other more established stocks. It was said to be based on 40 times the firm’s fiscal year 2016 operating earnings per share of $0.69. For a comparison, the consensus 2016 earnings per share estimate from Thomson Reuters is only $0.51, so a consensus estimate and a $28 valuation would dictate a 2016 implied price-to-earnings (P/E) ratio ahead of about 55.

Pandora’s consensus analyst price target is $21.33 and the median price target is $21.50. The highest price target remains up at $31. Pandora shares were trading up 1.1% at $15.60 after the report hit on Friday morning, and they have traded in a 52-week range of $14.56 to $37.88.

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