Apple and Sirius XM Aren't Killing Pandora

Pandora (NYSE: P  ) got what was -- on the surface -- the most embarrassing type of analyst upgrade yesterday. MKM Partners analyst Rob Sanderson is raising his rating on shares of the leading music streaming service from neutral to buy; but at the same time, he's slashing his 12-month price objective from $39 to $32.

It may come off as a mixed message, but that's only if you haven't eyed the stock's chart. Shares of Pandora nearly tripled last year, but they started off the week 44% below where they were when they peaked just two months ago. A price target of $32 may have been insulting when Pandora was trading north of $40 in March, but it represented a juicy return of better than 40% in a year when Sanderson made the call on Monday morning. 

Sanderson argues that Apple (NASDAQ: AAPL  ) isn't making a dent in Pandora's model with the copycat iTunes Radio service it introduced nine months ago. He also points out that Pandora is about to overtake Sirius XM Radio (NASDAQ: SIRI  ) in terms of listener hours.

Apple investors don't need to take it personally. There's a reason why Apple is reportedly about to announce a $3.2 billion deal for Beats Music parent Beats Electronics. Sirius XM investors also don't have to be worried. Pandora may be growing faster, but Sirius XM is the one generating the revenue and consistent profitability.

That's important. Sirius XM should top $4.1 billion in revenue this year. Sanderson sees Pandora ringing up $916.4 million in revenue for all of 2014. Pandora may have three times as many active listener accounts, but ad revenue is no match for the predictably steady trickle of subscription revenue.

Despite having a third as many active accounts, MKM Partners estimates that subscribers tuned in for 17.4 billion hours across Sirius XM's channels last year. That compares to Pandora reporting 16.7 billion hours in 2013. It's close, but Pandora is growing faster. In fact, back in 2011 Sirius XM was generating twice the amount of listener hours as Pandora. At that rate this could be the year that Pandora overtakes Sirius XM in total listenership. 

In theory, it doesn't matter. If both companies are growing -- and they are -- that's fine. They are gaining at the expense of terrestrial radio, and benefiting from the trend where music fans are consuming more now that they have greater control to fine tune what they hear. 

Sanderson isn't naive. He realizes that the online music market is about to get more competitive. Sirius XM and Pandora accounted for 85% of the non-terrestrial radio listening last year, and that will shrink in the coming years as Internet radio providers get smarter about making the most of connected cars. However, the pie is still expected to keep growing to the point where both Pandora and Sirius XM will keep growing. 

Sanderson sees Pandora earning a profit of $0.59 a share next year on $1.14 billion in revenue. The top-line growth and dramatic bottom-line surge will come not as a result of a growing user base, but primarily through Pandora getting sponsors to pay more to reach its mobile audience. There's room for Apple to carve out a niche here. There's clearly room for Sirius XM as it controls its satellite radio monopoly. However, Pandora will likely continue to be the volume leader in terms of content consumed once it takes the lead this year for some time. A lot of players may be making music at the same time, but this doesn't have to be a cacophony.

R.I.P. Internet -- 1969-2014
At only 45 years old... the Internet will be laid to rest in 2014. And Silicon Valley is thrilled. Because they know... The Economist believes the death of the Internet "will be transformative." In fact, the CEO of Cisco Systems -- one of the largest tech companies on the planet -- says somebody's going to bank "14.4 trillion in profit from one concept alone."

Click here for a FREE video that gives you what you need to capitalize on the little-known company behind this concept.

Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2955568, ~/Articles/ArticleHandler.aspx, 9/2/2015 7:54:21 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rick Munarriz

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.

Today's Market

updated Moments ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:00 PM
AAPL $112.34 Up +4.62 +4.29%
Apple CAPS Rating: ****
P $17.30 Down -0.16 -0.92%
Pandora Media CAPS Rating: *
SIRI $3.82 Up +0.06 +1.60%
Sirius XM Radio CAPS Rating: ***