Why Pandora Media Inc. Gained 19% in September

The music services' stock rose thanks to analyst upgrades, promising preliminary copyright ruling, and a threat that failed to materialize.

Anders Bylund
Anders Bylund
Oct 10, 2015 at 9:00AM
Consumer Goods

What: Shares of Pandora Media (NYSE:P) rose 19% in September, according to data from S&P Capital IQ. The digital music service has now delivered gains of more than 50% since bouncing off a deep bottom in July.

So what: Pandora scored several serious wins last month.

Analysts upgraded the stock both early and late, pointing to favorable traffic data and Pandora's heavy investment in a rapidly growing sales force. Pandora's strong traffic also undermined the idea that the recently launched Pandora-style music service from Apple would kill the older service. Furthermore, the U.S. Copyright Office issued an update on its thinking in music royalty collections, affirming that Pandora's existing distribution deals are on the right track.

Now what: The royalty proceedings will come to a head before the end of the year. The mid-September Pandora booster was not a final decision, but more of an insight into the agency's train of thought. Still, small victories can point to larger ones ahead, and that is exactly how Pandora investors interpreted this statement.

The royalties on the table are the ones flowing through online services, into the pockets of artists and their record labels. Looking beyond that issue, songwriters are also looking to hammer out a new legal framework for their royalties, and Pandora is keeping a close eye on that process as well. Speaking at an industry conference in September, Pandora CFO Mike Herring noted that the songwriting portion will need fresh laws baked up in Congress -- and that the current population on Capitol Hill are unlikely to get any functional royalty laws passed anytime soon.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

"I mean what did they pass -- 16 bills in 2014? It's not a very functional Congress at this point," Herring said. "So the things that are getting passed are really important; it's great." But music royalties are pretty far down the list of priorities, and won't be touched until the gridlock in Congress loosens up.

The Apple threat invites an eerily similar argument, by the way. The global music industry collected a grand total of $27.4 billion in 2014 sales, and Pandora represented just $920 million of that worldwide revenue stream. By contrast, Apple's sales added up to $183 billion last year. Cupertino's free cash flows were about double the top-line sales of the entire music industry.

The music industry may have kick-started its rise to the stars, way back in the iPod's heyday, but no longer matters much in the grand scheme of things. Sure, Apple could probably kill Pandora if it really wanted to. It's just not worth Cupertino's effort to make it happen nowadays. So you can write that threat off until further notice.