Spotify Throws a Wrench in Pandora's Growth Plans

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Pandora ( P ) has grown rapidly in the past few years and the stock's heady valuation suggests that the market expects this high growth to continue. However, we see some major competitive challenges that could cause Pandora's growth to stumble, in particular from competitors Spotify and Sirius ( SIRI ). Pandora is the leader in Internet radio and offers listeners personalized services based on preset choices and feedback. Apart from being available online, Pandora also has apps available on Apple's ( AAPL ) iPhone, Research in Motion's ( RIMM ) BlackBerry and other smartphones operating on Google's ( GOOG ) Android OS.

We currently have a price estimate of $10 for Pandora's stock , roughly 40% below the current market price.

Historic Growth Rate Unlikely to Continue

Pandora's services are currently confined to the U.S. due to licensing constraints in other countries. The total number of Pandora's registered users have almost quintupled over the past two years from around 22 million in January 2009 to over 100 million currently.

If this rate of growth continued in the U.S. alone, every U.S. citizen would have a Pandora account in just over a year's time which is nearly impossible and suggests that the market expects international growth to make up a large portion of its future growth.

Even though Pandora is pushing hard to realize its global vision, it needs to establish licensing agreements with individual countries and the pace of growth in these countries is difficult to predict. We believe that international growth will occur, but at a slower rate, reaching 340 million in around 5-6 years time.

Spotify's U.S. Entry a Threat

Spotify's entry into the U.S. market and its partnership with Facebook to make the music listening experience more social will be a threat for Pandora. (See: Pandora's Enemy at the Gates: Spotify Comes to the U.S. and Does the Facebook & Spotify Partnership Threaten Pandora?) Pandora' stock is down early this week in part because Spotify released its US version late last week.

How effectively the 'social music experience' offered by Spotify & Facebook will compete with the 'personalized music experience' delivered by Pandora remains to be seen. Nonetheless, we believe that through its Facebook partnership, Spotify is a formidable competitor and will compete for music listener hours and slow Pandora's growth.

A Sirius Roadblock in Auto Distribution

Besides, traditional computers and smartphone applications, Pandora has also developed relationships with major automobile manufacturers, including Ford (F), Mercedes-Benz (ETR:DAI) and MINI (BMW Group) as well as with suppliers to major automobile manufacturers in an effort to integrate Pandora in current and future automotive sound systems.

However Sirius XM Radio ( SIRI ) has a significant presence in the automobile market, and many automotive subscribers like Sirius's ad-free offering and exclusive content and curated music playlists. This could make it difficult for Pandora to make a significant impact in this market.

Content Expansion Provides Some Support

Despite the competitive threats, we like Pandora's efforts to expand its content offering. Many radio listeners are drawn to comedy, sports, talk, news and other forms of content beyond music. According to Arbitron, non-music content accounted for approximately 20% of total radio share in 2009.

In May 2011, Pandora began offering comedy stations that can be personalized to each listener's tastes. As Pandora continues to expand its personalization and discovery service to different types of content, there will be an opportunity to attract more users to its services and also grow the user's listening hours on its platform.

See our full analysis of Pandora

 



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 , GOOG , P , RIMM , SIRI

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