Pandora (P) Stock Up Today After Analyst Upgrade

Pandora (P) stock is higher Wednesday morning after CRT Capital upgraded the company to 'buy' from 'fair value.'

By Kurumi Fukushima , Mar 18, 2015 9:34 AM EDT

NEW YORK (TheStreet) -- Shares of Pandora Media (P) are up 2.92% to $16.19 in early market trading Wednesday, after analysts at CRT Capital upgraded the music streaming company to "buy" from "fair value" this morning.

Analysts at the firm also upped its price target to $22 from $16, citing more favorable content cost scenarios.

The firm added that Pandora's proposed performance royalty rates would increase profitability and could lead to a valuation of $36 per share.

Oakland, CA-based Pandora provides Internet radio services on smartphones, tablets, traditional computers and car audio systems, as well as a range of other Internet-connected devices.

Pandora provides service through two models including a free service and Pandora One, generating revenue from advertising. The company's playlist generates algorithms that predict listener music preferences.

Insight from TheStreet's Research Team:

Christopher Versace commented on Pandora in a recent post on RealMoney.com. Here is what Versace had to say about the stock:

If you're a fan or a shareholder of companies that provide music streaming services, you're going to want to pay attention to Tuesday's Senate Judiciary Committee hearing to be held by Sen. Mike Lee (R-Utah)
The companies include Pandora Media (P), Apple's (AAPL) iRadio, Amazon's (AMZN)Prime Music, Microsoft (MSFT) Xbox Music, Sony (SNE) Music,Yahoo! (YHOO) Music,AOL (AOL) Radio or Spotify.
Those companies and others like Netflix (NFLX) have benefitted from the shift in consumer preference to streaming digital content (music ands video) over downloading albums, music singles, movies and TV shows.
According to Nielsen (NLSN) SoundScan, sales associated with downloaded albums and songs plummeted in 2014. Paid downloads of albums and songs fell 9% and 12%, respectively.
American consumers bought 257 million albums in 2014, of which 106.5 million were through downloads. Looking past albums sales, individual digital song sales fell to 1.1 billion in 2014 from 1.26 billion in 2013. The use of streaming grew sharply to 164 billion songs -- a 54% increase from 106 billion in 2013 -- thanks to services such as Spotify, Amazon.com, Pandora and Google's (GOOGL) YouTube.
According to from Edison Research's "Share of Ear" report, more American teenagers listen to Spotify, Pandora, and other streaming music services than traditional FM broadcast radio. "Share of Ear" measures all forms of music listening, including downloads, streaming services, online radio, and traditional AM/FM broadcast channels.
Company estimates show Pandora's share of U.S. radio listening increased from 8.6% in December of 2013 to 9.7% in December 2014. As measured by ComScore, Pandora's total multi-platform unique visitors grew by 7% to 89.4 million.
These companies, particularly the ones streaming music, have had their profitability held in check, however, by onerous royalty rates. In 2014, Pandora's non-GAAP revenue reached $906.6 million. The way the company pays royalties goes like this. Content acquisition costs increase with each additional listener hour. The more you listen, the more they have to pay in royalties.
It also paid a record $439 million to rights owners in 2014, up 34% year over year. At the end of 2014, the Pandora paid more than $1.2 billion in cumulative royalty payments.
I warned several months ago of the looming problem facing the streaming music industry if the American Society of Composers, Authors and Publishers (ASCAP) and other performing right organizations are freed from the "consent decree" issued by the Justice Department in 1941. That decree was to ensure a competitive marketplace. That battleground is once again heating up.
Faced with perhaps the most disruptive challenge to the music industry -- streaming -- a concerted effort is underway to alter the existing consent decree.
Just like the argument to raise the minimum wage without realizing the full consequences of higher costs on business, what's being proposed might yield more revenue. But the higher fees would be passed on to businesses and consumers across the country. The risk is that substantially-higher costs could stifle the one growth area left in the music industry.
That's why Tuesday's Senate hearing is something investors in Pandora, Amazon, Apple, and even to some extent, Google need to consider. Not only does it put the streaming music industry and the Performing Rights Organizations (PROs) under the microscope, but the fallout also could pave the way to re-shape the streaming content industry.
Depending on the outcome, it could make for a different take on Apple's acquisition of Beats and make for a grim outlook for Pandora shares.