3 Key Trends for Pandora

Pandora (NYSE:P) is the leader of Internet radio and offers personalized radio channels using pre-set preferences and feedback that are provided by the listener. Users can tune in online or via apps that are available on Apple’s (NASDAQ:AAPL) iPhone, Research in Motion’s (NASDAQ:RIMM) BlackBerry and other smartphones that operate on Google’s (NASDAQ:GOOG) Android OS. These mobile apps are helping drive growth in its mobile ad business that we estimate contributes almost 60% of the company’s value.

As of April 2011, Pandora had over 90 million registered users, adding a new registered user almost every second. Pandora has over 50% market share in Internet radio listening time among the top 20 stations and networks in the United States.

We currently value Pandora at $1.9 billion – or about $10 a share, which is 25% below the current market price. Below we take a look at some key trends driving the stock.

See our full analysis for Pandora.

1) Growth in Monthly Mobile Listener Hours per User

In the past few years, listeners have tuned in to Pandora’s music streaming services through mobile devices like iPhones. In 2008, listener hours on mobile devices represented around 4.6% of Pandora’s total listener hours over both online and mobile devices. By the first quarter of 2011, this figure had reached above 60% of total listener hours.

This has been driven by the boom in consumer mobile Internet usage growth due to the higher penetration of smartphones and mobile broadband access. Smartphone sales are expected to grow at a healthy pace going forward and will drive continued growth in Pandora’s listener hours on mobile devices.

2) Growth in Mobile Advertising

Along with the rise in consumer mobile Internet usage growth, mobile advertising is expected to grow rapidly from $877 million in 2010 to around $6.8 billion in 2014 — a near 70% compound annual growth rate. ^[1] The Pandora music app is already one of the most popular apps in the world and so Pandora is well placed to capitalize on the expected growth in mobile advertising and grow its ad-revenues per 100 listener hours.

3) Internet Radio Royalty Fees to Rise

The Copyright Royalty Board has set the royalty rates for Pandora Internet radio. These rates do not apply to the satellite radio as Internet is considered a different medium.

These rates are considered on a per “performance” basis – i.e. if 100 users listen to one song then it is counted as 100 performances. These rates, which are expected to increase year-on-year, can meaningfully increase Pandora’s content acquisition cost and hurt its bottom-line if Pandora is unable to pass cover these costs through its revenues. You can modify the forecast chart below to see that the forecast is extremely sensitive to this driver.

See our full analysis for Pandora.

1. According to IDC, as reported in Pandora’s S-1, filed with SEC on May 26 2011 [↩]