Internet radio services provider Pandora Media, Inc. (P) of late has been facing the brunt of the rising cost of music. While the company issued a positive outlook for the fourth quarter and full-year 2014, analysts are concerned about its rising marketing cost. In fact, FBR Capital Markets downgraded Pandora Media’s ratings, eventually affecting its stock prices.
The company’s share prices went down 2.2% (43 cents) on Tuesday after gaining 1.8% the previous day.
One of the key reasons behind Pandora appearing less impressive in the near term is the impact of the 2016-2020 performance fees to be announced by the Copyright Royalty Board (CRB).
The fee is expected to be high as producers of record labels are demanding higher royalty rates since digital plays for record labels have registered a steep rise. Pandora Media already pays higher royaltiesthan satellite radio representing almost 50% of its revenues. We believe any further rise would hurt revenues and contain margin expansion.
Further, its gradually declining monthly subscriber base remains a major headwind, particularly since competition continues to increase, indicating defections to other services. With growing popularity of iTunes and Beats Music from Apple, Inc. (AAPL), Prime Music from Amazon.com (AMZN) and Google Play Music Songza music services and recently launched Music Key from Google Inc. (GOOGL), the digital music services business has become highly competitive.
So rising costs related to licensing will remain a concern in the near term in addition to higher operating expenses.
Nevertheless, improving monetization and strong mobile growth are the positives. We believe that Pandora will benefit from the growing listening hours, market share gains and introduction of the new music recommendation units called Promoted Stations.
Improving listening hours is necessary for subscriber growth, in our view, which is the primary revenue source for Pandora. The company's plan to launch service in cars, another positive factor, will help it to grow in this market. Its partnerships with Ford, Holden and Mazda in Australia expand its service in the region, which will boost ad revenues, going forward.
Currently, Pandora has a Zacks Rank #3 (Hold).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment