Pandora Has Carved a Narrow Moat and Is Compellingly Cheap

After two years of operational improvement, industry outperformance, and a share price rally, Pandora's shares sold off in 2022 on rising doubts over feasibility of midterm goals and inflation concerns. In contrast, we now believe that Pandora shares are compellingly cheap and that the company has dug a narrow economic moat thanks to its brand intangible assets. We think that Pandora’s pricing power (as evidenced by its high-70% gross margin) should persist through its high share of gifting (over 60% of sales), which is less price sensitive. Further, we are now more convinced about the longevity of the appeal of charms and charms bracelets, Pandora’s core product category, given its long track record (contributing 70%-80% of Pandora’s revenue from its IPO in 2009, in existence since 2000) and solid recovery over the last three years following marketing boosts and successful product introductions. We see the company’s goal of doubling business in the U.S. as ambitious but attainable, while growth in China remains a long-term opportunity (our forecasts imply doubling the business by the end of the decade from 2019 levels versus management’s goal of tripling it). Further, we believe product line expansion has a higher likelihood of success compared with prior introductions. Finally, we believe that inflation concerns for Pandora may be overdone. Despite past high price elasticity, we believe Pandora is in a better position to pass small price increases to consumers due to its exposure to gifting.