Wall Street Analysts Like Pandora, Investors Not So Sure

Pandora (NYSE: P) shares popped nearly four percent in pre-market trading Monday after several analysts issued bullish research reports on the internet radio company — then settled quickly as soon as the market opened. The stock’s whipsaw action reflects optimism about the booming online radio market, tempered with doubts about the company’s prospects in the face of competition from Apple (NSDQ: AAPL), Google (NSDQ: GOOG), Amazon (NSDQ: AMZN) and upstart Spotfiy.

Pandora went public at $16 per share last month, raising $235 million, but its stock fell sharply after Spotify’s long-awaited U.S. debut. Today’s bullish analysis from Morgan Stanley and others helped send the stock to $18.74 in early action, but investors remained unconvinced, sending the stock down 2.27 percent to $17.62 after the opening bell.

Earlier this month, Pandora told analysts it has 100 million registered users, up from 90 million in April, and said it anticipates its radio market share will increase to 3.6 percent from 2.3 percent by the end of 2010.

Morgan Stanley analyst Scott Devitt and his colleagues, who assigned an equal weight rating to the stock with a $20 price target, see potential upside in Pandora’s penetration and its more passive listening model. Some highlights:

Penetrating Audio, Online, and Mobile Ad Markets: Pandora accounts for 4% of overall US radio listening, but its revenue base is less than 1% of the $13B broadcast radio business. It also targets the online ($10B) and mobile ($800MM) advertising markets with display ads.

Competitive Landscape is Dynamic: Technological innovation is driving new models for music listening, demonstrated by cloud-based offerings from Apple, Amazon and Google and ultra-fast on-demand models like Spotify. But 80% of music listening is passive and we believe Pandora will succeed with this model.

Challenges on Horizon, Execution Key: To reach its potential, Pandora must: 1) monetize mobile without compromising user experience, 2) secure economically viable rights agreements outside the US, 3) sign up additional auto distribution deals, and 4) renew US streaming rights in C2015 at similar or better rates.

Several other Wall Street banks issued bullish reports on Pandora on Monday morning, according to stock market trading site theflyonthewall.com (sub req’d.)

Wells Fargo — Outperform, target range $21-$23
Citigroup — Buy, target: $25
JP Morgan — Overweight, target $22