How to Justify Pandora's Valuation at $17

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Pandora's ( P ) is finally above its pre-IPO price of $16 after a few weeks of wild gyrations in the stock that have ranged from $26 to $12. While our valuation of 1.9 billion implies a near $10 price estimate , we look at a scenario on how to justify the current $2.8 billion market cap - near $17 stock price - as the company fends off competitors like local AM/FM radio stations, other Internet radio stations and satellite radio leader Sirius XM Radio (NASDAQ:SIRI).

Growth in Registered User Base


As of April 2011, Pandora had around 94 million registered users adding a new registered user almost every second. If total registered Pandora users continue growing at the same pace as in 2011 Q1, it can reach 130 million by the end of the year. Thereafter, we expect the user base to grow throughout the Trefis forecast period, albeit at a slower rate.

Here are some drivers that could add upside to our existing user base growth forecast:

1. Mobile Internet usage growth

But Pandora could outperform our expectations it can better capitalize on the expected boom in mobile Internet usage growth with its apps available on Apple's ( AAPL ) iPhone, Research in Motion's (NASDAQ:RIMM) BlackBerry and other smartphones operating on Google's (NASDAQ:GOOG) Android OS.

2. Expanding sales force

Pandora plans to continue hiring additional personnel to build out its sales force and ad operations team as well as expand its business development team to establish relationships with manufacturers of mobile, connected devices.

3. Targeting the auto-market

Pandora continues to expand its relationship with major auto manufacturers like Ford ( F ), Daimler's (ETR:DAI) Mercedes-Benz and GM ( GM ) to offer its services. The U.S. auto market has recovered from its lows in 2009 and is becoming an important way for Pandora and Sirius to reach new customers.

4. Adding content in addition to music and comedy

In May 2011, Pandora began offering comedy stations that can be personalized to each listener's tastes. Over the long term it can identify and exploit opportunities to offer other types of content in addition to music and comedy.

5. International growth

Currently, Pandora offers its services only in the U.S. but evolving licensing regulations will enable it to launch in other international markets over time.

More than 43% upside potential for Pandora's valuation

If Pandora is able to capitalize on the above-mentioned factors and grow its registered user base can grow well ahead of our estimates to reach around 500 million registered users by the end of our forecast, then its fundamental valuation will stand at almost $2.8 billion implying nearly 40% upside to our forecasts. This scenario only looks at one factor of Pandora's valuation and assumes that the economics of its business - like content acquisition costs and ad revenue per user - remain in line with our estimates.

You can drag the trend lines in the modifiable chart above to see the impact of the number of subscribers on Pandora's valuation or scroll visit our site to see a dynamic breakdown for Pandora including several modifiable drivers.

See our full analysis for Pandora here



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AAPL , F , GM , P

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