) 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
). 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 (
) iPhone, Research in Motion's (
) BlackBerry and other smartphones operating on Google's (
) 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
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
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
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 (
) 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
See our full analysis of Pandora