Pacific Crest On Pandora: Betting On A Bailout Is A Speculative Strategy

Pacific Crest’s Andy Hargreaves believes that while the pending launch of Pandora Media Inc’s (NYSE: P) on-demand service might limit the downside to the stock in the near term, the company’s “long-term profit potential remains challenged,” which is expected to prevent significant long-term appreciation in the stock.

The analyst maintained an Underweight rating on the company.

Near Term Floor

“Pandora's plan to increase ad load and take advantage of moments of consideration to transition ad-supported users to subscriptions should help improve near-term profitability and drive an initial wave of subscribers at relatively low cost, both of which could help limit near-term downside,” Hargreaves explained.

However, the analyst estimated that the monthly churn in Pandora Media’s subscription services would at least be 4 percent, which indicates the company would be competing for subscribers in about 18 to 24 months.

At that time, the customer acquisition costs were likely to be in line with those of Pandora’s competitors, which could make it unlikely for the company to achieve its 2020 profit targets.

Related Link: Pandora Investors: Expect Losses Through Most Of 2017

Little Equity Value

On the other hand, Pandora Premium, which is presently being beta tested on about 1,000 people, is scheduled for launch in late March.

“Although we believe it is appropriate to delay the product if it is not ready, the delay raise our concern that the product will have flaws,” Hargreaves stated.

The analyst continues to believes the company’s long-term cash flow outlook justifies “little equity value,” although Pandora’s data, users and brand do have clear value, making it the company a potentially attractive M&A target.

“However, given the potential downside to intrinsic value as a stand-alone business, betting on a bailout is a speculative strategy that we do not recommend pursuing,” Hargreaves added.