Sirius XM Isn't the Only Floor Under Pandora

By Markets Fool.com

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Investors spend a lot more time dreaming of the ceiling than worrying about the floor, but at least one Wall Street pro thinks that buyout buzz will provide downside protection for Pandora Media (NYSE: P)investors. FBR Capital analyst Barton Crockett feels that the potential for a buyout of the digital music pioneer -- as well as a recent report that Pandora is nearing the launch of an on-demand service similar to Spotify and Apple's (NASDAQ: AAPL) fast-growing Apple Music -- could keep declines in check for the historically volatile stock.

The Wall Street Journal reported on Friday that Pandora's nearing deals with the major record labels, paving the way for the new offering to launch as soon as next month. Unlike Pandora's flagship music discovery service where tunes stream based on algorithmic reads of listener tastes, the new platform would let users pick out the tunes they want and create customized playlists.

Sources tell the Journal that Pandora will offer an ad-supported free tier as well as two premium subscription plans. The pay options are important, since less than 5% of Pandora's current users are premium subscribers. The high-tech radio service is consumed primarily as free ad-based entertainment. Pandora mentioned in last month's earnings call that it would be introducing an on-demand service later this year, but a rollout as early as the third quarter would be a very exciting development.

Making a match

Bears will argue that there's already a lot of buyout chatter helium in the stock. Pandora stock kicks off this week trading 88% higher since bottoming out in February, and a good chunk of those gains have come on the heels ofThe Wall Street Journalreporting this summer thatSirius XM Radio(NASDAQ: SIRI)-- through its controlling stakeholder --attempted to buy Pandora at a price of $15 a share that was rebuffed as too low. Sirius XM went on to offer some kinds words about Pandora during its second-quarter earnings call.

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"Pandora probably has the best chance of becoming profitable and probably has the most reasonable business model in that class," Sirius XM CEO Meyer said at the time.

It's easy to see why Sirius XM would want Pandora. Sirius XM has been a rock star in the realm of satellite radio, topping 30 million subscribers to its premium radio platform. However, Sirius XM hasn't been as successful with its streaming offerings. Buying Pandora would broaden Sirius XM's listener base, making it the king of satellite and streaming radio. Pandora taking on Spotify and Apple with an on-demand offering would only make it a juicier acquisition candidate. Sirius XM would be getting a two-for-one deal, covering both niches of music streaming.

The callers are waiting

The potential suitors don't end at Sirius XM. If Pandora does launch an on-demand service next month, it will become that much more attractive to Apple, Spotify, and the other tech giants that haven't been very successful in this market.

This is where things can get interesting. Sirius XM is a logical buyer, but why wouldn't Spotify or a cash-rich tech titan buy Pandora to reach its 78.1 million users? Bears will argue that Pandora is fading because its user growth has stalled, but those that are still around are leaning on the service more than ever. Pandora users averaged a record 24 hours of listening per month in its latest quarter.

Crockett's bullish note this morning comes with a reiteration of his outperform rating. He also has a $16 price target, more than what was allegedly offered earlier this summer -- but probably not as much as Pandora can rake in if it is able to make a dent in the on-demand streaming market later this year.

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Rick Munarriz owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Pandora Media. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.