Bob Peck: Pandora Revenue Has Even More Potential Than Previously Thought

In a report published Wednesday, SunTrust Robinson Humphrey analyst Bob Peck discussed Pandora Media Inc P's revenue potential from its Sponsored Listening ad unit which is set to be rolled out in the third quarter.

Pandora's ad unit allows the listener to take advantage of one hour of ad-free music streaming by listening, viewing and interacting with an advertisement from a brand that sponsors the ad-free hour.

Peck said that from the listener's point of view, the one interactive ad will create an improved overall listening experience given a full hour free of interruptions. On the other hand, the analyst argued that the advertiser benefits, as well as the ad unit should drive higher engagement and awareness.

Meanwhile, Pandora is expected to receive $0.20 to $0.40 for every completed unit which equates to an RPM (revenue per 1,000) of $200 to $400 which is substantially higher than the mobile ad-supported RPM of $46 the company reported in the second quarter.

Related Link: OTR Global: Pandora View Has 'Deteriorated' On Ads, Local Radio Spending

Peck further crunched the numbers and assumed the new ad unit can achieve an RPM of $200. By further assuming the ad unit goes from zero percent of mobile ad-supported hours to 10 percent, the company could create a $250 million lift in total annual revenue. This figure would represent an approximate 15 percent lift to 2016 consensus revenue estimates.

"Between sponsored listening, mobile display programmatic, and the ongoing mix shift to local (salesforce build), we believe Pandora's monetization engine has significant tailwinds through 2016," Peck argued.

Finally, Peck singled out three other key items to watch (in order of importance): 1) the CRB Web IV rate determination, 2) competitive landscape versus Spotify's "freemium" offering which may be cut, and 3) the impact of Apple Inc. AAPL's streaming music offering beyond the initial trial period, if any.

Shares of Pandora remain Buy rated with an unchanged $25 price target.