Pandora (
P
) is the leader of Internet radio and offers personalized radio
channels using pre-set preferences and feedback that are provided
by the listener. Users can tune in online or via apps that are
available on Apple's (
AAPL
) iPhone, Research in Motion's (NASDAQ:RIMM) BlackBerry and other
smartphones that operate on Google's (NASDAQ:GOOG) Android OS.
These mobile apps are helping drive growth in its mobile ad
business that we estimate contributes almost 60% of the company's
value.
As of April 2011, Pandora had over 90 million registered users,
adding a new registered user almost every second. Pandora has over
50% market share in Internet radio listening time among the top 20
stations and networks in the United States.
We currently
value Pandora at $1.9 billion
- or about $10 a share, which is 25% below the current market
price. Below we take a look at some key trends driving the
stock.
See our full analysis for Pandora.
1) Growth in Monthly Mobile Listener Hours per
User
In the past few years, listeners have tuned in to Pandora's
music streaming services through mobile devices like iPhones. In
2008, listener hours on mobile devices represented around 4.6% of
Pandora's total listener hours over both online and mobile devices.
By the first quarter of 2011, this figure had reached above 60% of
total listener hours.
This has been driven by the boom in consumer mobile Internet
usage growth due to the higher penetration of smartphones and
mobile broadband access. Smartphone sales are expected to grow at a
healthy pace going forward and will drive continued growth in
Pandora's listener hours on mobile devices.
2) Growth in Mobile Advertising
Along with the rise in consumer mobile Internet usage growth,
mobile advertising is expected to grow rapidly from $877 million in
2010 to around $6.8 billion in 2014 - a near 70% compound annual
growth rate. The Pandora music app is already one of the most
popular apps in the world and so Pandora is well placed to
capitalize on the expected growth in mobile advertising and grow
its ad-revenues per 100 listener hours.
3) Internet Radio Royalty Fees to Rise
The Copyright Royalty Board has set the
royalty rates
for Pandora Internet radio. These rates do not apply to the
satellite radio as Internet is considered a different medium.
These rates are considered on a per "performance" basis - i.e.
if 100 users listen to one song then it is counted as 100
performances. These rates, which are expected to increase
year-on-year, can meaningfully increase Pandora's content
acquisition cost and hurt its bottom-line if Pandora is unable to
pass cover these costs through its revenues. You can modify the
forecast chart below to see that the forecast is
extremely
sensitive to this driver.
See our full analysis for Pandora.