Pandora (NASDAQ: P) reported strong first quarter results on Thursday, beating both revenue and earnings consensus estimates. Revenues in the quarter came in at about $319 million (+1% year-on-year), while the company reported a loss of 27 cents per share on an adjusted basis. The narrower than expected loss was driven by strong growth of its premium subscriber base and ARPU, slightly dampened by subdued advertising revenue. As a result, the stock jumped nearly 8%, driven by robust growth in subscription revenue. Subscription revenue now contributes to nearly 33% of overall revenue and grew to nearly $105 million (+63% year-on-year), driven by an increase in premium subscribers and ARPU. However, the company has seen its active monthly users and total listener hours decline steadily over recent years, which resulted in pressure on advertising revenue (-4% year-on-year). Pandora’s acquisition of AdsWizz should help it stem the decline in ad revenue. In addition, we are optimistic about Pandora’s 2018, driven by robust growth in premium subscribers, its organizational redesign, which should help it to improve margins, and the growth opportunity in the digital audio market.
The company’s stock is now trading at around $6, which is slightly below our price estimate of $7. We have created an interactive dashboard elaborating on our valuation process. You can adjust the key drivers and forecasts and arrive at your own price estimate for the company’s stock.
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For 2018, Pandora remains optimistic about further expanding its subscriber base, driven by podcast services, more device partnerships, and increased music consumption. While any changes to royalty payments should increase expenses for the company, that could limit damages charged in related lawsuits. Furthermore, its latest acquisition of AdsWizz – a digital audio ad tech company – which is likely to expand its addressable market, should provide decent medium-term growth opportunities and boost its advertising revenues. Further, the organizational redesign should help it to improve margins. We expect the positive outlook for Pandora to continue into 2018, driven primarily by the massive growth opportunity in the digital audio market, smart speakers, and increased consumption of podcasts.
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