Morgan Stanley: Pandora's Path To Revenue Growth Isn't Guaranteed

Streaming music provider Pandora Media Inc P is the leader within the growing U.S. digital audio ad market, but a path toward long-term revenue growth and positive free cash flow isn't a certainty, according to Morgan Stanley.

The Analyst

In a July 3 note, Morgan Stanley's Benjamin Swinburne maintained an Equal-weight rating on Pandora with a price target lifted from $6 to $8.

The Thesis

Pandora's management team is taking the right steps to position the business to deliver revenue growth, but it is too early to declare success, Swinburne said in the research report. (See his track record here.)

Encouragingly, Pandora is operating within a U.S. streaming audio ad market that should grow at a 9-10-percent compounded annual growth rate through 2022, and its 65-to-70-million free user base is more than double its closest peer, the analyst said.

The acquisition of AdsWizz could put the company in a better position to win advertising share, Swinburne said — but Alphabet Inc GOOGL GOOG's recent announcement of its own programmatic audio through DoubleClick Bid Manager represents a competitive overhang for Pandora, he said.

Investors may want to consider taking a "wait-and-see approach" over the longer term, the analyst said. In the short run, investors should hold a more cautious stance on advertising revenue and active user growth, he said.

Under a bull case scenario, Pandora can grow its advertising revenue at a 12-percent compounded annual growth rate through 2022, which would warrant a stock price of $13 per share, Swinburne said. In a bear scenario, lower-than-expected advertising revenue and subscriber declines could force management to raise additional capital, and the stock would be worth $3 per share., he said.

Pandora's risk-reward profile is balanced at today's levels, according to Morgan Stanley.

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Photo courtesy of Pandora.