Despite Positive CRB News, Pandora Can't Forget About Costs

• Shares of Pandora Media Inc P have declined 29.89 percent over the past three months, trading close to their 52 week low on October 30.
• Barton Crockett of FBR & Co. has upgraded the rating on the company to Market Perform, with a price target of $16.
• Following a better than expected CRB decision, the company aims to make 2016 an investment year. However, Crockett warned that Pandora Media should keep higher publishing costs in mind.

Analyst Barton Crockett explained that management’s intention to make 2016 an investment year would be OK for the stock if usage and RPM growth reaccelerate.

However, “if usage is weak and ad-loads are constrained by competitive concerns for the user experience —a distinct possibility in this environment—then the investor reaction to stepped up investment could be choppy,” Crockett cautioned.

The previous estimate had been for an actual cost of per songs of $0.20, which represented a 27 percent increase from the 2015 levels. However, following the CRB decision, the blended CRB per song performance fee growth would actually be 15 percent. This implies $64 million increase in yearly music performance rights costs, as compared to the earlier estimate of $119 million.

“Longer term, the benefit, relative to our former estimates, is greater because the CRB does not have a revenue percent minimum,” Crockett stated, while mentioning that higher publishing costs, at least for 2016, could offset some of this upside.

On the other hand, management emphasized on its CRB call that given the greater certainty regarding CRB costs, it intended to invest for longer term opportunities.

“We see likely investments as music rights, tech, and personnel to build on-demand in the U.S. and to go global,” Crockett added.