Cowen Downgrades Pandora Amid 'Lower Ad Loads'

• The share price of Pandora Media Inc (NYSE: P) has declined 55.6 percent over the past six months, dropping to less than 20 cents above the 52-week low on February 9.
• Cowen’s John Blackledge has downgraded the rating on the company from Outperform to Market Perform, while lowering the price target from $21 to $9.
• Due to expectations of lower ad loads, the top line and earnings estimates for 2016 and the estimates for 2017–2021 have been lowered, which has in turn led to the downgrade in the rating.

Analyst John Blackledge believes that 2015 was a transition year for Pandora given the significant changes that occurred, such as the acquisition of Ticketfly and Rdio in 4Q15, the CRB rate decision finally coming in and higher competition, which pressured listener hour and user growth, as well as the ability to increase ad loads.

According to the Cowen report, “The recent acquisitions of Ticketfly and RDIO suggest P is diversifying its revenue stream and could be indicative of challenges at the core biz.”

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The FY16 and long-term ad revenue estimates have been reduced, with the 2015–2020 CAGR now at 12 percent from the earlier 19 percent to reflect significantly lower ad load expectations.

The audio ad load estimates for 2016–2020 have also been lowered to reflect the impact of rising competition on Pandora Media’s ability to increase its ad loads in 2H15. Higher ad loads affect the listener experience, Blackledge explained.

Although pricing was strong during 2015, lower ad loads would have a large longer-term impact, “limiting revenue upside,” the report said.

“Our top-line estimates could prove to be conservative if P is able to reaccelerate listener hour growth in ’16 and LT and/or raise ad loads near our prior expectations,” Blackledge added.

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