Pandora’s Value Contingent on Strong Growth in Ad Revenues

Pandora’s (NYSE:P) advertisement sales for its streaming radio service has been sluggish of late, particularly from its mobile platform. This is a growing concern given the competition that Pandora faces from SiriusXM Radio (NASDAAQ:SIRI) and the Spotify-Facebook partnership. However, with sustained growth expected in online advertising and Pandora’s expanding  subscriber base, mainly among smartphone users, we expect Pandora’s revenues from both web and mobile based ads will increase.

We currently have a Trefis price estimate of $9.94 for Pandora’s stock, which is about 25% below the current market price. To see some of our key drivers for Pandora as well as upside/ downside scenarios, see our recent note Upside & Downside Scenarios for Pandora.

While we estimate Pandora’s ad revenue per 100 listener hours will rise from $2.70 in 2011 to $5.10 by the end of our forecast period, Trefis members project an increase from $3 to $5.80 during the same period. The member estimates imply 20% upside to our Pandora stock price estimate. Pandora’s stock is very sensitive to ad revenues since mobile and online ads together constitute around 80% of our price estimate for Pandora.

Online & Mobile Ads Market Growth to Continue

The online display, rich media and video advertising market was $9.8 billion in 2010 and is expected to grow at a 15% annually to $17 billion in 2014, according to market research firm IDC. ^[1] Pandora, a key online radio player, should be a major beneficiary of this market and this should drive its ad revenue per 100 listener hours. Growth in mobile advertising in fact is more impressive than online advertising. According to research company EMarketer, spending on mobile advertising will increase 6x between 2009 and 2014, reaching $2.55 billion. ^[2]

Large Subscriber Base Attracting Advertisers

Pandora’s subscriber base has been growing rapidly over the past few years, from just 11 million subscriber in 2007 to over 90 million as of April 2011. This large user base makes Pandora attractive to advertisers. According to the company, 60% of Pandora listening comes from the mobile market, up from just 12% two years ag0, ^[3] and given the exponential growth expected in mobile advertising market, we believe Pandora’s ad revenues will improve in the long run.

Our complete analysis for Pandora’s stock is here.

1. A New York Times article citing IDC Research [↩]
2. Mobile Advertising and Marketing: Past the Tipping Point, EMarketer [↩]
3. Tepid ad sales crimp Pandora, Journal Gazette, July 25, 2011 [↩]