Pandora's New Deal Adds Up on Wall Street

Pandora (NYSE: P) is struggling to turn freeloaders into paying customers, so it's beefing up the ways that it can cash in on its ad-consuming majority. The company announced on Wednesday that it's acquiring AdsWizz, an ad tech firm specializing in digital audio advertising. The transaction is valued at $145 million in a combination of cash and Pandora stock, and it's expected to close in the second quarter.

At least one analyst likes the news. Justin Patterson at Raymond James is upgrading the stock following the deal. He is boosting his rating on Pandora stock from market perform to strong buy. He's setting an $8 price target, suggesting a beefy 63% of upside from Wednesday's close.

Turning up the volume on opportunity

Patterson feels that AdsWizz will double Pandora's total addressable market to $28 billion. He feels the deal can add $4 a share in value to Pandora as it helps the meandering streaming-radio pioneer expand its reach and accelerate tech initiatives. AdsWizz will give publishers a way to more effectively monetize audio content. Advertisers will also benefit by being able to buy and measure their ideally broader marketing campaigns.

Pandora could use a spark. Investors weren't impressed with last month's mixed fourth-quarter results. Adjusted revenue rose by a better-than-expected 7%, but its adjusted loss was larger than analysts were forecasting. More importantly, the top-line guidance it provided for the current quarter was well short of where Wall Street pros were perched. AdsWizz could be the catalyst to boost revenue at Pandora.

The goal at Pandora lately has been to increase its base of premium users. Given the ridiculous market cap that Spotify is likely to debut at in two weeks, it's easy to see why the market and Pandora alike are angling for a more well-heeled clientele. Pandora is making some headway on that front. It closed out 2017 with 5.48 million Pandora Plus and Pandora Premium members, up from the 5.19 million paying users it had three months earlier. However, this is still just 7% of its 74.7 million active listeners.

Buying AdsWizz isn't Pandora throwing in the towel when it comes to premium subscriptions. The iconic streaming innovator is merely fortifying how it can cash in on the other 93% of its audience. AdsWizz should also bring new audio advertisers into Pandora's fold, and if the end result is increasing the average revenue it can generate per user, then the platform's meandering ways may seem like less of a problem to investors. Pandora will keep trying to convert its masses into users of either its ad-free version or the Spotify-like on-demand platform it rolled out last year. Now it will just have a better way to monetize those that don't buy in, and that makes this a smart deal.

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Rick Munarriz owns shares of Pandora Media. The Motley Fool owns shares of and recommends Pandora Media. The Motley Fool has a disclosure policy.