Pandora Delivers Solid Q3, but Inventory Buildout and Network-Driven Growth a Concern; Shares Cheap

We are maintaining our fair value estimate for narrow-moat Pandora as the company delivered revenue growth in the third quarter and stuck to its full-year targets, which assume sequential worsening conditions in the fourth quarter, at the lower end. So far, fourth quarter has been trending in line with the third quarter. We see shares as deeply undervalued at current levels, trading at 7 times consensus forward earnings, in 5-star territory with more than 100% upside to our fair value estimate. We believe that current share price implies long-term free cash flow decline for the business, which looks pessimistic given the company’s leading market share, brand recognition, exposure to gifting that usually benefits from higher pricing power, and strong recent execution.