The good news is somebody on Wall Street thinks Pandora is building its local ad sales team to generate more revenue. The bad news is somebody on Wall Street thinks the costs of building out its local ad sales teams will hurt Pandora's profitability.
Morgan Stanley downgraded Pandora to equal weight from overweight Monday, helping drive Pandora shares down about 4% in morning trading. The rating is one of three given to stocks as a rating of its relative appeal. In financial analyst parlance, equal weight means a stock is relatively less attractive than an overweight stock and relatively more attractive than an underweight stock.
The Morgan Stanley analyst issued the downgrade because he believes Pandora is preparing to "aggressively ramp its local radio sales teams" and these costs "will likely challenge profitability."
The day-to-day fluctuations of Pandora's stock price are not as important within the music industry as some of their causes. In this case, local advertising could mean anything from concert advertising to improved financial health -- some day -- for musicians' top source for webcasting royalties. The more people listen to Pandora, the more musicians and record labels get paid.
This particular analyst's downgrade -- in weighting, not in price target -- is a bit more notable due to the source: Morgan Stanley was an underwriter of Pandora's June 2011 initial public stock offering. But that doesn't mean Morgan Stanley has always been in love with the stock. Morgan Stanley put a relatively low target price of $20 on Pandora back when Pandora went public and warned of profitability concerns. But the bank upgraded Pandora to overweight three months later.