How Pandora's Stock Takes Off

After surging post-IPO, Pandora's ( P ) stock is drifting lower as concerns surface over the competition posed by SiriusXM Radio (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 audience.

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 preferences.

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.

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

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

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