After surging post-IPO, Pandora's (
) stock is drifting lower as concerns surface over the competition
(NASDAAQ:SIRI) and the Spotify-Facebook partnership as well as
doubts on its ability to fully exploit the opportunity in mobile.
While our forecasts current values
Pandora at around $10
, which is about 25% below the current market price, we look at
some scenarios surrounding the growth in mobile which could provide
for ample upside from our forecast.
Factors that Could Raise Pandora's Mobile Ad Revs
1. Mobile advertising set to explode
Just as shifting consumer consumption to online media has driven
online advertising growth, the mobile advertising market is
expected to grow as well as more users access the Internet through
mobile devices. Along with consumer mobile Internet usage growth,
mobile advertising is expected to grow rapidly from $877 million in
2010 to $6.8 billion in 2014 at a CAGR of 67%.
2. Interesting mix of advertising options offered
Pandora offers different types of 7 to 20 second audio ads along
with display ads. Besides this Pandora also offers a mix of rich
media ads such as: tap to video, tap to app and tap to call. This
provides advertisers an innovative way to interact with the target
3. Higher user interaction in Pandora ads
Unlike other radio services which can cram almost 20 ads in an
hour of music, Pandora runs a maximum of three audio ads or less
per hour. Banner ads appear only when the mobile device is unlocked
and not dimmed. This guarantees greater consumer interaction and
provides a more lasting impact of the advertisement.
4. Demographic specification for advertisers
Pandora streamed approximately 3.8 billion hours of music in
2010, and this is expected to increase wildly. Because Pandora
streams the music, it can precisely tell the audience size at any
given time. It also allows advertisers to reach individual
listeners based on their age, gender, zip code and music
5. International expansion
Pandora currently operates only in the United States. However
Pandora aims to become a global Internet radio provider. As Pandora
expands to other countries, it will become a great advertising
platform for major global businesses.
Upside potential for Pandora's valuation
If Pandora is able to grow its mobile ad revenues per listener
hour by just 13% instead of at the 11% annual clip that we
currently forecast, our valuation would be just under $14 - almost
smack in line with the market currently. However if this grew at
around a 15% rate, the valuation climbs to around $16 and implies
about 15% upside from the current market price. At a 20% rate this
implies well over 30% upside to the market price.
You can drag the trend lines in the modifiable chart above
to see the impact of different trends on Pandora's valuation.
See our full analysis for Pandora here.