Pandora’s shifting box and other notes
$DJIA is down -500 points in the last 24 hours, but is still up 100 points from its lowest levels earlier in the week. Wild. I’d rather be a buyer than a seller right now.
So where am I now that the dust is setting a little bit and Pandora’s actually down more than 10% from its highs yesterday morning. Here’s what JP Morgan’s analyst had to say about the ruling’s impact on $P:
“Pandora Media Inc : CRB Ruling a Major Win for Pandora; Certainty & Path to a More Profitable L-T Business; Reiterate OW & PT to $30 (from $25) – We view the 2016-2020 Copyright Royalty Board rate determination as a major win for Pandora as the 15% increase in blended rates for 2016 was within expectations and the annual step-ups are more muted, supporting better-than-expected L-T profitability. We believe these rates provide a solid foundation for moving forward with direct deal negotiations that should expand P’s addressable market to include on-demand functionality & Int’l rights. We believe that the visibility and certainty into Pandora’s largest expense line will broaden its investor base, and provide management better ability to budget product, sales, and marketing investments that support reacceleration of users, hours, and revenue growth. We also note that the new rate structure eliminates the previous % of revenue royalty payment floor, which has historically been an overhang on P’s strategic value. While we have confidence in P’s ability to get direct deals done, the economics and timing are uncertain, so we are only incorporating the new 2016-2020 CRB rate structure in our updated estimates, with no changes to business model, product, users, or investments. We reiterate our Overweight rating & our DCF-based YE’16 PT increases to $30, as the longer-term effect on profit from an inflation-based annual royalty rate increase is positive.”
What sticks out in that commentary to me is the fact that despite this ruling being a quote-unquote “major win” for Pandora, the analyst isn’t changing anything in his business model, product, users or investment numbers. So essentially, fundamentally, nothing’s changed for Pandora here. The big risk with this short is two-fold. It’s possible that some bigger fish, say Microsoft (might make a good fit actually) or Alibaba (highly doubtful) or someone could try to buy Pandora at some point.
Secondly, the company has finally started negotiating directly with the major and independent record labels to secure rights to expand into new countries and enable Pandora to become more like Spotify and the current Apple Music model whereby you can stream/download specific songs, albums, artists, etc rather than the radio-like model that Pandora is losing grasp on quickly as Spotify and Apple Music radio are stealing share. Were Pandora to get to the point where it’s trying to take market share from Spotify and/or Apple Music in the stream/download what you want, the tide could potentiall turn quite positive for Pandora in a hurry. Pandora’s got nearly 100 million monthly users and it’s only in three countries and it’s the de facto standard Music App on every kind of platform you can think of, from car dashboards to smartphones to TVs and other platforms.
Like the JP Morgan analyst wrote there: “We believe these rates provide a solid foundation for moving forward with direct deal negotiations that should expand P’s addressable market to include on-demand functionality & Int’l rights…” But that ” While we have confidence in P’s ability to get direct deals done, the economics and timing are uncertain.” Can Pandora’s management get their model shifted to on-demand/streaming/download or will it fail to move quickly enough and make it profitable in time?
Aside from the judgement, the fact that Pandora is trying to make a major strategic move and getting on the offensive side of the on-demand music model vs being only a broadcast music model business is a new development. For now, I’m holding my smallish $P short position steady and putting the stock in the penalty box.
Other notes:
I’d mentioned I expected a sell-the-news reaction in $DIS as it would drop despite what would be a record-setting opening for Star Wars. Well here we are, $DIS is down 4% even as Star Wars shatters records doing $130,000,000 globally last night.
$SCTY is a good potential short candidate. The company has $1.5 billion in debt offset by just $500 million in cash and is supposed to lose more money this year than last year, as in -$8 per share and losing hundreds of millions of dollars per year. I’m going to take a deeper look at this one over the holidays as a potential short candidate.
