Pandora Media Inc (NYSE:P) shares jumped around 6.5% today and closed up to $20.34 (up 2.47%) after receiving an upgrade from Goldman Sachs’ Heath Terry. Terry upgraded Pandora Media Inc (NYSE:P) to “buy” with a $27 price target.
Terry gave the company a bump after three-straight quarters of accelerating ad revenues, especially on mobile devices. Terry also pointed out that for the first time, ad growth surpassed the growth rate of the cost of buying music licenses.
Pandora Media Inc (NYSE:P) subscription growth has accelerated in the past 3 quarters, largely due to the company’s expansion in cars, TVs, and Android devices.
Pandora Media Inc (NYSE:P) recently capped free usage on mobile devices. Terry said that this will be a “big boost” for subscriptions and will hold margins down by cutting some of Pandora’s heaviest users.
“Competitive concerns better understood. Since going public in mid-2011, seven of the 10 days in which Pandora has sold off 10% or more have been the result of news or speculation around emerging competitive risks,” stated Terry.
“With iTunes Radio, Google Play, and Spotify?s Internet radio services better understood, we believe the potential for major competitive headline risks has largely diminished,” added Terry. “In addition, over the past 16 months, Pandora?s share of mobile Internet radio minutes has remained relatively unchanged, hovering around 80% despite the introduction of multiple competitive services.”
Goldman Sachs acknowledged that Pandora was a lot more popular amongst in 2005 and people are trying other music platforms, but they believe that the decline was primarily driven by the free mobile listener hour cap:
“Usage growth has steadily decelerated since Pandora went public, albeit on large rates of growth, and where that growth could stabilize is a point of contention. While listener hour growth had slowed to 50% in 4Q13 from over 100% just a year earlier, the decline from 50% down to 18% in 2Q14 was largely driven by the free mobile listener hour cap which was imposed in March (April listener hour growth slowed to 24% from 49% in April). Active listener hour growth has remained more stable at 30% growth in 2Q14 from 35% in 1Q14 and 40% in 4Q13,” added Terry.