Shares of Pandora (P) are sliding after Morgan Stanley analyst Benjamin Swinburne downgraded the stock to Equal Weight from Overweight as he believes growing ad revenue in 2018 is no longer a given as the company faces engagement and monetization challenges.
Moving to the sidelines
In a research note to investors this morning, Morgan Stanley’s Swinburne downgraded Pandora to Equal Weight from Overweight and cut his price target on the shares in half to $6 from $12. The analyst believes that growing ad revenue in 2018 is no longer a given as Pandora faces engagement and monetization challenges. Healthy ad revenue growth is critical to driving gross margin leverage against rising music licensing costs, he contended.
Swinburne thought Pandora could potentially reach 10% advertising growth this year, but a nearly 15% decline in listening hours in 2017, an over 5% decline in ad supported monthly active users and slower growth in advertising ARPU lead him to lower his outlook for 2018 ad growth. Pandora’s core free product has not evolved meaningfully and faces continued innovation by Spotify, Apple (AAPL) and Amazon (AMZN) while also being pressured by free music available on Google’s (GOOG; GOOGL) YouTube, the analyst argued.
Swinburne noted that Pandora’s new management team is working to add interactivity to its free product and has introduced its own premium on-demand service, but while these investments should help stabilize listening over time, it is likely a shift into non-music content such as podcasts that could drive more meaningful engagement growth.
Beyond engagement, the two other drivers of ad revenues are ad load and ad pricing, he pointed out, while adding that it is increasingly clear that consumers’ willingness to accept more ads is limited.
Price action
In morning trading, shares of Pandora have dropped over 8% to $4.76.
