Pandora (
P
) 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 (NASDAQ:RIMM) BlackBerry and
other smartphones operating on Google's (NASDAQ:GOOG) Android
OS. Advertising is the primary source of revenue for Pandora and
mobile advertising contributing around 60% while online advertising
contributing another 27% of our
$1.9 billion Trefis estimate for Pandora's
valuation
.
Here we highlight some of the most important drivers for
Pandora's business and some upside and downside scenarios using our
modifiable charts.
~40% Upside Scenario: $2.6 billion Trefis Value Estimate
for Pandora
1. Higher Registered Users Growth (+17%)
:
We currently expect
Pandora's registered user base
to continue increasing over the remaining Trefis forecast period
even though we expect the growth to decelerate over time.
Mobile Internet growth, Pandora's expanding sales force,
its foray into the automobile segment, additional content, and
international expansion can add some upside to our growth
assumption for Pandora users. These factors could grow
Pandora's registered user base by 2% points more than our current
growth projections implying more than 17% upside to Pandora's
value.
2. Higher Growth in Ad Revenues (+20%)
:
Along with consumer mobile Internet growth, mobile advertising
is expected to grow rapidly from $877 million in 2010 to $6.8
billion in 2014, a 67% compound annual growth rate.
The Pandora music app is already one of the most popular apps in
the world. Therefore, Pandora is well placed to capitalize on the
expected mobile advertising growth and grow its ad-revenues per 100
listener hours. Interesting a mix of advertising option on
Pandora, higher user interaction in Pandora ads and its
expansion in to other territories could make Pandora attractive for
an increasing number of businesses. This could increase our
forecasted growth rates by 2% points more than our current growth
expectations, implying almost 17% upside to Pandora's value.
~40% Downside Scenario: $1.2 billion Trefis Value
Estimate for Pandora
1. Lower Registered Pandora Users (-22%):
Pandora's registered user base has increased exponentially in the
recent past. However, the absolute numbers of Pandora users might
soon hit the ceiling if the company is unable to expand its service
offering internationally due to continued music licensing
restrictions. This could shave off around 3% every year from our
current growth expectations, implying almost 22% downside to
Pandora's value.
2. Increased Content Acquisition Costs (-17%):
Content acquisition expenses principally consist of royalties paid
for streaming music to the listeners. While Internet radio royalty
fees are expected to rise with time, an increasing number of users
and increasing listener hours will also require Pandora to pay
more royalties in the per track fee agreement.
Pandora may be unable renegotiate royalty rates with the
Copyright Board in a favorable and maybe unable to pass
on these increased costs to customers in the form of increased
subscription fees. If Pandora is able to decrease content
acquisition costs as percentage of revenues by only 2% every year
over the short term before stabilizing over the rest of our
forecast horizon, then this would imply more than 17% downside to
Pandora's value.
See our full analysis for Pandora