Pandora (P) Draws a Price Target Hike from Wells Fargo; Here’s Why

Even with the slight lift in target expectations, Wells Fargo's Peter Stabler still spotlights 3% in loss potential for P shares.

It’s a great day to be a Pandora Media (NYSE:P) investor, thanks to last night’s stronger-than-anticipated first quarter earnings outclass. Shares today are jumping up 25% faster than Jack’s magic bean sparking right into a giant beanstalk. Yet, though one sidelined analyst sees fit to get more confident thanks to a stronger advertising guide, was P’s report a flawless one?

No, says Wells Fargo analyst Peter Stabler, who sees that “better advertising contrasts with weaker sub growth” for the music streaming giant. As far as Stabler is concerned, this is a quarter that “contained fuel for bulls and bears alike.”

As such, the analyst reiterates a Market Perform rating on P stock while boosting the price target from $6 to $7, which implies a 3% downside from current levels. (To watch Stabler’s track record, click here)

Stabler explains, “On the positive side, ad revenue came in solidly ahead of consensus, beating our forecast by a healthy 13%. On the other hand, we believe Pandora continues to cede ground to competitors, as ad revenues continue to decline year/year.”

For the first quarter of 2018, P’s active listeners and listener hours outperformed the analyst’s expectations by 2%, although reported year-over-year losses of -6% in active listeners and -5% in listener hours. The giant’s adjusted EBITDA of ($73.3 million) fared much better than the analyst’s expectations looking for ($92.1 million) as well as the Street’s of ($90.3 million).

As far as local advertising is concerned, growth fell mostly flat. Stabler’s translated takeaway here: “Spotify’s expanding ad-supported listener base and concerted national sales effort (both direct sales and programmatic) continue to pressure Pandora’s national advertising revenues. Subscription net adds of 140K fell significantly short of our +285K estimate, where mgmt color suggested that a deeper marketing push may follow more rounds of performance marketing testing and the launch of a family pricing plan later this quarter. In terms of 2Q guidance, wide revenue and EBITDA ranges were offered that bracketed pre-print consensus, with mgmt noting that ad revenues are increasingly skewing to in-quarter orders, reducing visibility.”

Though the analyst lifts his ad expectations for the rest of 2018, he likewise scales back sub growth expectations. For full-year 2018, the analyst takes revenue from $1.48 billion up to $1.54 billion and adjusted EBITDA from ($129.5 million) to ($96.5 million).

Moving forward, the analyst is convinced a comeback to ad-supported hours growth is crucial for the giant to generate a return to continuous ad revenue growth. True, Stabler believes in the digital audio-oriented growth prospects at hand. This does not speak to his conviction in ad load growth to serve as a substantial growth driver. While Stabler gives competitive edge to the company’s subscription offering, he sees a tardy entry into the battle and warns that rivalry to win subscribers continues “fierce as ever” before. Ultimately, the analyst concludes wagering investors seek proof of key quarterly net add growth to be able to deem the giant a legitimate premium sub competitor down the line.

TipRanks reveals Stabler is not the only one on the Street hedging his bets on this tech player. Out of 18 analysts polled in the last 3 months, 7 are bullish on P stock while 11 remain wary on the sidelines. With a loss potential of almost 10%, the stock’s consensus target price stands low at $6.46, indicating caution is baked into these analysts’ expectations.

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