Mo-Mo Pair Trade? FBR Downgrades Netflix, Upgrades Pandora

• Barton Crockett FBR presented a pair trade idea in a report on Friday: upgrading Pandora Media Inc (NYSE: P) to Outperform and downgrading Netflix, Inc. (NASDAQ: NFLX) to Market Perform.
• Crockett maintained a $16 price target on Pandora's stock but trimmed his target on Netflix's stock to $100 from $125.
• Crockett cited reduced "fears" surrounding Pandora's stock and cited valuation as a factor for Netflix's downgrade

Pandora Upgraded To Outperform

Crockett upgraded Pandora's stock rating to Outperform from Market Perform with an unchanged $16 price target.

According to Crockett, Pandora's fourth quarter results were "squishy, but ok." Perhaps more importantly, the analyst argued that management's guidance of a $70 million EBITDA loss in 2016 is actually "encouraging."

Crockett continued that Pandora plans to spend an additional $120 million in 2016 to offer users a new on-demand music service. The company also offered a five-year outlook which lessens "fears" of further spending "surprises."

Related Link: Pandora's 5-Year Plan 'Ambitious,' Morgan Stanley Says

Crockett also noted that Pandora set expectations that its licensing costs in on-demand will represent approximately 65 percent of revenues which is a "reasonable ballpark assumption."

Crockett further suggested that Pandora holds a key advantage over Apple Inc. (NASDAQ: AAPL)'s streaming music service and Spotify: the ability to directly target its existing subscribers to switch over to an on demand service.

Finally, Crockett acknowledged that Apple, Spotify and others could have an interest in acquiring Pandora to to use its active user base as a "source of leads" for their subscription on demand services. The analyst even named Facebook Inc (NASDAQ: FB) is a top suitor as an acquisition would make the social media giant "completely dominant in mobile" and "give it new expertise in music that could be taken global."

Netflix Downgraded To Market Perform

Crockett downgraded Netflix's stock rating to Market Perform from Outperform with a price target lowered to $100 from a previous $125.

Crockett's downgrade is purely fundamental. The analyst explained: "We derive our $100 price target, lowered from $125, using a sum-of-the-parts analysis, with a DCF that values domestic streaming at $25 (7x 2020E operating profits). We value international at 3x the U.S., with a market opportunity abroad that is 5x the U.S. in terms of addressable broadband homes."