Pandora Media Inc (NYSE:P) is the dominant player in the Internet radio space, with 80 million active users, who account for almost 10 percent of all U.S. radio listeners. Apple Inc. (NASDAQ:AAPL)’s new music streaming service is getting under the skin of Spotify, but Pandora Media Inc. may prove to be a different kettle of fish!
Analysts at Morgan Stanley and Needham believe that the three-month free trial of Apple Music will likely take its toll on Pandora Media in the short run; but Pandora’s “freemium” model of non-subscribing, ad-supported streaming provides a distinct advantage in the long term.
Pandora’s “Freemium” Model is a Winner
According to estimates provided by Morgan Stanley, Apple Music is projected to cut Pandora’s aggregate listening hours by as much as 3 percent in the third quarter. The fall-out was that the bank reduced its target price for Pandora to $17 and reaffirmed an “equal-weight” rating. , citing no immediate catalyst for the stock to outperform.
But Morgan Stanley does not expect this downtrend to sustain too long, with Pandora’s listener hours forecast to bounce back and grow at an annual 3 percent per-user rate over the next five years.
Analyst Ben Swinburne believes that as more and more cars get connected, people may decide against paying Apple Music’s $9.99-a-month fee and instead switch to Pandora’s free ad-supported listening. Moreover, as Pandora Media improves monetization, content costs will likely decline over the next couple of years.
As regards royalty rates, Pandora is sitting pretty, with per-track fees expected to grow by around 30 percent next year, which would still be much below the rate fixed by the Copyright Royalty Board. Swinburne also believes that Pandora’s size and potential for overseas expansion gives it further sway among major labels.
“We believe the $475 million in revenues Pandora represents to the labels is too significant and further revenues from enabling international distribution too much an opportunity, that ultimately the labels would settle to keep Pandora in business if needed,” Swinburne wrote in a note to clients.
Pandora’s Head-Start May Be Too Much for Apple
Analysts at Needham reiterated their buy rating on the stock with a price target of $20. Although Pandora Media currently derives less than 10 percent of its net revenue from the in-car segment, the brokerage estimates that the company has almost a five-year lead on rival in-car streaming competitors. Needham also expects Pandora’s recent attempts to bolster its ad sales team to more than offset the near-term dip in margins.
Shares of Pandora Media soared 3 percent to $15.11 on Thursday, but are down close to 10 percent in the past three months, compared to the 2 percent decline in the broader S&P 500. Shares of Apple fell 2 percent to $120.07.
Pandora is scheduled to release second-quarter results on July 23. The consensus on Wall Street is for per-share earnings of 2 cents, compared to the 4 cents the company recorded in the year-ago period. Quarterly revenue should come in at $283 million; a 29 percent year-over-year jump from $219 million in 2014.