Spotify's Advertising Ramp Could Be Pressuring Pandora's Sales

Wells Fargo said Spotify is closing the gap to Pandora Media Inc P in session starts, and its advertising ramp could pressure Pandora’s national sales.

Closing The Gap

Citing Triton data, the brokerage said Spotify has effectively closed the gap, posting a measured U.S. session start total in October just 3 percent below that of Pandora.

“The progress here has been steady, leading us to believe Spotify could possibly pass Pandora before the close of the year,” analysts at Wells Fargo wrote in a note.

Strength In The Sector

However, Wells Fargo said Pandora continues to maintain a roughly 50 percent lead in total estimated streamed hours in the U.S. due to the product differences.

That said, Pandora’s national sales could feel the pinch from Spotify’s aggressive advertising ramp despite Pandora’s strong supply of ad-supported hours.

“[C]hecks with ad agency digital and traditional radio buyers suggests to us that Spotify has significantly ramped its selling efforts, with a focus on large media agencies,” the analysts highlighted.

Wells Fargo also pointed out that Spotify has nearly matched Pandora's offerings and has pulled ahead in the area of programmatic audio, along with private marketplaces capability.

In fact, the brokerage said the increasing resonation of Spotify brand among national advertisers could be partly responsible for the recent weakness in Pandora’s national channel.

“Though we believe Spotify's chief goal remains building its subscription base, we believe the inherent value that digital audio offers over terrestrial radio will compel Spotify to compete for its share of the growing digital audio advertising market,” the analysts added.

Rating And Valuation

Meanwhile, Wells Fargo maintained its Market Perform rating and valuation range of $12–$14 on Pandora shares, saying that Pandora’s listening hours are in line with the brokerage’s fourth-quarter estimate.

Shares of Pandora closed Wednesday’s trading at $13.33.