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Pandora Continues to March Higher on Buyout Speculation

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Music streaming pioneer, Pandora Media, Inc. has started gaining momentum again.

In the last one month, the company’s shares have surged over 20%. The stock received a boost after May 16 when the hedge fund Corvex Management revealed that it has doubled its stake in Pandora (within a short span of six months!) to become the largest stakeholder of the company. Since then, Corvex has been pushing Pandora’s management to review its business strategy and to seek an attractive offer. No doubt investors have been quite pleased with the possibility.

Background

This is not the first time that the Pandora has been considered an acquisition target. In March, talks regarding its sell off had surfaced as the company is struggling due to increasing costs, rising competition and increasing loss. In such a scenario, management brought back founder Tim Westergren to take the helm hoping that he would be able to chalk out a sustainable growth strategy for the company.

However, having Westergren back implied that the company wasn’t considering a sale then. After all, its valuation had reduced significantly last year and it wasn’t the best idea to sell the business off when the prices were (nearly) at an all-time low.

 

PANDORA MEDIA Price and Consensus

PANDORA MEDIA Price and Consensus | PANDORA MEDIA Quote

 

What Now?

Since the last month however things have started to turn around for the company as investors are regaining confidence on the possibility of sale.

Furthermore, the company’s shares got another boost yesterday when Axiom Capital upgraded Pandora’s shares stating “We now believe that there is a greater probability of Pandora building a successful and differentiated on-demand service while increasing the value of the core. Users’ appetite for paying for music streaming is increasing and Pandora is poised to capture share cost effectively. Moreover, Pandora’s multi-pronged model reduces the risk of dependency on the core business to drive shareholder value.”

So while it remains uncertain as to whether Pandora will consider a suitable offer in the near future, the company has been slowly building on its core product, which has now started to gain momentum. The upcoming on-demand streaming service, in our view, will open new avenues for the company to shift its model towards licensed services, thereby reducing its total dependency on advertisement revenues.

Moreover, Pandora has accumulated an impressive volume of data for more than a decade which will allow it to differentiate its offerings to meet user requirements effectively. In addition, the company will be able to leverage technological strengths of its acquisitions like that of Rdio to build a novel offering.

Apart from the core offerings, the company is also gradually expanding in other markets with its Ticketfly acquisition and strategic collaborations to diversify its revenue channels.

In such a scenario, Pandora might consider remaining independent for now. The company will likely remain under pressure till it delivers some concrete results. Meanwhile, mounting competition from the likes of Spotify, Apple (AAPL - Free Report) and Amazon (AMZN - Free Report) remain concerns.

Currently, Pandora carries a Zacks Rank #3 (Hold). A better-ranked stock in the same space is Internap Corporation (INAP - Free Report) carrying a Zacks Rank #2 (Buy).

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