Since my previous column on Pandora Media Inc (NYSE:P), the market seems to have become much more optimistic about Pandora stock. The Street appears to have embraced the idea that the shares’ risk/reward ratio is quite attractive in the wake of the $480 million investment by Liberty’s Sirius XM Holdings Inc. (NASDAQ:SIRI) in the company.
Street Bullish, Stock Has Jumped
On July 24, CNBC reported that activist investor Jana Partners had purchased an undisclosed stake in Pandora stock. According to CNBC, which cited an unnamed source, Jana believed that P stock was undervalued and felt that the company’s ad revenue could increase.
On July 5, Morgan Stanley analyst Ben Swinburne, noting that Sirius’ investment “shores up” Pandora’s balance sheet, “resumed coverage of P stock with a $12 price target and an “overweight” rating. And on June 22, Gabelli analyst John Tinker started coverage of Pandora stock with a $12 price target and a “buy” rating, citing the investment by Sirius XM and his belief that the valuation of P stock was cheap compared with most internet companies.
Moreover, P stock has rallied sharply in the last several weeks, jumping around 40% since it hit $6.91 on June 19.
More Rallies Coming for Pandora
But the shares still have a great deal of room to run, as Pandora stock has many powerful positive catalysts, including a new CEO on the horizon and its subscription music business.
On June 27, P announced that its CEO, Tim Westergren, would resign. At this point, the company has a number of attributes that should enable it to attract a top-notch CEO who has a proven track record of boosting consumer-facing internet properties. Such a CEO should be able to greatly enhance Pandora’s content and marketing efforts, making a significant positive impact on its results and ultimately lighting a fire under Pandora stock.
Pandora’s improved balance sheet should be appealing to CEO candidates, who will have plenty of money to spend on marketing and content improvements. Additionally, prospective CEOs could be attracted by the idea that they could potentially advance within the Sirius XM/Liberty family i.e. they could one day become CEO of Sirius and/or Liberty.
Of course, Pandora’s large user base and high name recognition won’t hurt when it comes to attracting quality candidates either.
The market seems to be very skeptical about Pandora’s subscription business. As Variety noted, “growing Pandora’s paid business will take time and resources. Investors were unwilling to give the company either, and skittish at every bump in the road.” But as Variety also pointed out, Pandora has “a well-designed product and a built-in target audience of 80 million monthly users.” These monthly users have shown that they like streaming music in general and Pandora’s product in particular.
Moreover, Pandora can easily market its subscription service to these users, and the funds provided by SIRI will enable the company to do so more effectively and more easily.
Other Positive Catalysts for P Stock
There are other important reasons to like Pandora that I and/or others have previously identified: Liberty’s sterling track record in turning around SIRI, Sirius’ ability to align the incentives of Pandora’s executives more closely with the interests of the company’s shareholders, and cut Pandora’s costs, and the opportunity to share content and technologies between the two platforms.
Additionally, Pandora, with Sirius’ help, can bring its service to many overseas markets.
Furthermore, with P stock still trading at a tiny price-to-sales ratio of around 1.66, its valuation remains quite appealing. Finally, its subscription revenue rose 19% year-over-year in the first quarter, indicating that it is continuing to grow at a healthy rate.
With its shored-up balance sheet, powerful potential positive catalysts, and low valuation, Pandora stock should be appealing to both value investors and growth at a reasonable price investors. But all investors should look to buy at least a little P stock at current levels.
As of this writing, Larry Ramer owned shares of Pandora stock.
