Pandora’s (NYSE:P) stock dipped earlier this week primarily due to a downgrade of media companies by Goldman Sachs (NYSE:GS), citing weaker expected advertising market. Unlike other radio players such as Sirius XM (NASDAQ:SIRI), Pandora depends heavily on advertising, which constitutes almost 80% to its value and so is quite sensitive to the general state of economy. We maintain our $8.65 intrinsic price estimate for Pandora, which is about 30% below market price primarily because of two risks.
Firstly, as mentioned above, the economy is expected to continue to remain soft and consequently ad pricing may not grow. Secondly, with Clear Channel’s launch of Pandora-like app and website, the competition is intensify in the coming weeks. An analyst from BTIG has gone as low as $3.75 on Pandora’s price target, which we believe is too bearish.
To counter risks, Pandora is trying to give its users a better experience. The company recently revamped its website and expanded to Hyundai’s Veloster. Pandora also stated that it continues to see shift of advertisement from traditional to internet radio. Although these are positive developments, we think that the stock may be overvalued as the risks due to recent economic and competitive headwinds are likely to weigh on it in medium term.
Our price estimate for Pandora Media stands at $8.65, implying a discount of roughly 30% to the market price.
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