As for Netflix and Pandora, they are a bit tougher to value, but both are disruptive in their respective fields of online content distribution and Internet radio.
With Netflix shares having gone into bear market territory, down 23% from the March 4 high, and off 5% year to date, Anmuth is confident "Netflix can continue to improve the quality of its streaming video service to drive greater leverage and scale across its subscriber base, and ultimately exercise pricing power through tiered plans." He believes that the launch of House of Cards in February, along with other content, likely boosted subscriber additions, and that momentum should carry throughout the year.
The biggest fears surrounding Netflix, aside from increased competition, are the concerns about net neutrality, demonstrated in the recent additional payment from Netflix to Comcast (CMCSA). "However, we believe the recent Comcast deal came at economics that did not change the equation much for Netflix, and we have already seen early improvements in Comcast speed," Anmuth note. "We believe there is slightly more streaming video competition on the margin, with both Amazon and Hulu pushing into originals more and Amazon into the living room with FireTV. However, we continue to believe Netflix content is superior, and FireTV also features Netflix.
Terms of the Netflix/Comcast deal, announced in February, haven't been disclosed.
Anmuth rates Netflix shares "overweight."
Pandora, which has seen its shares collapse 28% since their March 5 high, remains Anmuth's favorite SMid-cap name (rated "overweight"), as it's a "highly compelling pure play on mobile advertising."
Here's Anmuth thoughts on Pandora:
"We note recently released March listener metrics included reacceleration of hours (+14% Y/Y and +13% M/M vs. +9% Y/Y growth in Feb-14 and +8% M/M growth in March-13) and continuation of gains in U.S. radio market share despite some increased competition. Importantly, we believe hours growth will accelerate more in 2Q as Pandora fully laps its 40 hour mobile listening cap starting in April. We believe that Pandora is at an inflection point on monetization, and profitability should increase going forward as 1) Pandora's 9.1% market share of total US radio continues to ramp; 2) radio buy-side platform integration and backend improvements should continue to remove friction from the buying process and attract more ad spend; 3) Pandora continues to build out its local sales force (now in 32 of top 40 markets); and 4) cost-control policies, including the limit to mobile skips, should help control content costs, enabling both more investment and better profit. Recent concerns continue to center around hours growth-even with better than expected March data-and increased competition. We look for significant increases in 2Q and 3Q hours growth, but also believe that low mobile sell-through rates (30-35%) and higher pricing can drive meaningful RPM improvements, with greater de-coupling between growth in hours and growth in revenue over time."
-- Written by Chris Ciaccia in New York
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