How Much Can Pandora Benefit From Snapchat Partnership?

Music streaming platform, Pandora (NASDAQ: P) recently announced a new social media partnership with Snap (NASDAQ: SNAP). The company saw its stock touch $8 shortly thereafter as there was positive sentiment surrounding the deal. The deal will allow Snapchat users to share songs directly with friends or as part of their Snapchat stories using unique song cards. The recipients of these song cards will have to watch an ad and then play the song. This should help drive Mobile Advertising revenue. The partnership marks Pandora’s intention towards social media integration, and the company believes that music sharing via Snapchat should provide access to its millions of users. We believe the deal should help boost Pandora’s paying subscribers over the long run and provide a strong long-term growth opportunity, assuming Snapchat users embrace the concept.

Based on the recent partnership with Snapchat, we expect Pandora’s Mobile Advertising revenue to increase from $1 billion to about $1.1 billion in 2018, as a result of an uptick in listener hours and total active users. This could lead to a modest valuation upside for Pandora. We have summarized our expectations on our interactive dashboard platform. If you disagree with our forecasts, you can change the key drivers for the Mobile Advertising segment to gauge how changes will impact its expected revenues, margins and earnings.

For 2018, Pandora remains optimistic about further expanding its subscriber base, driven by podcast services, more device partnerships, and increased music consumption. However, the Snap partnership is unlikely to add significant value to the top line in 2018. The deal, over the long run, should boost ad revenues and could potentially boost Pandora’s paying subscribers, but is unlikely to move the needle much in the immediate term. The company’s acquisition of AdsWizz – a digital audio ad tech company – is likely to expand its addressable market, and should provide decent medium-term growth opportunities with respect to its advertising revenues. We expect the positive outlook for Pandora to continue into 2018, driven primarily by the massive growth opportunity in the digital audio market, smart speakers, and increased podcast consumption.

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