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Investment Overview for Pandora (NYSE:P)
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Below are key drivers of Pandora's value that present opportunities for upside or downside to the current Trefis price estimate for Pandora:
Upside potential
- Increased growth rate of Pandora's active users: We currently expect Pandora's active user base to continue increasing over the remaining Trefis forecast period even though we expect the growth to decelerate over time. However certain factors such as mobile internet usage growth, Pandora's expanding sales force, the company's foray into the automobile segment, additional content, and most importantly, international expansion can lead to an increase in the growth rate of Pandora users. If these factors can grow Pandora's active user base to a level 10% higher than what we currently forecast, there can be more than 10% upside to the Trefis price estimate.
- Growth in mobile monetization: Along with the increase in consumer mobile internet usage growth, mobile advertising spending is expected to grow rapidly, from $877 million in 2010 to $6.8 billion in 2014, at a 67% compound annual growth rate (According to IDC, as reported in Pandora's S-1, filed with SEC on May 26 2011). Pandora's music app is already one of the most popular apps in the world and thus places the company in a strong position to capitalize on the expected mobile advertising growth. Interesting mix of advertising options on Pandora, higher user interaction on Pandora ads, and expansion in other territories could make Pandora attractive for an increasing number of businesses. If the above factors increase our end-of-period forecast for mobile monetization by about 10%, there could be close to 10% upside to the Trefis price estimate.
Downside potential
- Decline in growth of active Pandora users: Pandora's active user base has increased exponentially in the recent past ad we expect this figure reach 108 million by the end of our forecast period. However, the total number of active Pandora users could soon hit the ceiling if the company is unable to expand its service offering internationally due to continued music licensing restrictions, and competitors such as Clear Channel, Spotify and possibly Apple make a serious dent into Pandora's growth. If, as a result, Pandora's active user base grows to only about 85 million by end of our forecast period, there could be downside of about 20% to the Trefis price estimate.
- Increased content acquisition costs could offset Pandora's ad revenue: 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, increasing number of users and increasing listener hours will also require Pandora to pay more royalties in the per track fee agreement. Pandora maybe be unable to favorably renegotiate royalty rates with the Copyright Board. If this implies that Pandora can not bring down these costs (as % of revenues) from current levels, there could be about 30% downside to Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Pandora at the top of the page.
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Pandora is a leader in internet radio in the U.S. and stands out in its ability to offer a unique and personalized internet radio experience to listeners. By analyzing the intrinsic qualities of music the firm is able to create stations and then adapts playlists in real-time based on user feedback.
At the end of 2011, Pandora had over 125 million registered users and had 69% share of all internet radio listening time among the top 20 stations and networks in the U.S. Since its launch in 2005, Pandora listeners have created over 2.4 billion stations.
At the heart of Pandora is its Music Genome Project and its specialized algorithms for generating playlists. This technology delivers music based on each individual's preference and taste. The extensive musicological database of the Music Genome Project has been meticulously built by a team of professional musicians and musicologists analyzing up to 450 attributes for every song in their vast collection, to capture the fundamental musical properties of each recording. Pandora's Music Genome has over over 800,000 songs from over 80,000 artists.
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Pandora's major source of revenue are through advertisements it serves on its mobile and web platform. Pandora provides a great marketing platform for advertisers. Some of its salient features include:
Growth in monthly mobile listener hours
In the past few years Pandora has seen wider acceptance of its music streaming services through mobile platforms. In 2008, listener hours on mobile devices represented around 4.6% of Pandora's total listener hours over both online and mobile devices. In 2011 this figure rose to 65% of total listener hours while the 2012 figure seems to be heading towards 77-78%.
Higher user interaction in Pandora ads
Pandora's uncluttered listener interface maximizes the impact of advertisements. Pandora's display and video ads show up when listeners click on Pandora features such as thumbs-up, thumbs-down, changing a song. Currently Pandora serves less than one minute of audio ads per hour of listening. This guarantees greater consumer interaction and creates a longer lasting impact of the advertisement.
Demographic specification for advertisers
Pandora streamed approximately 8.2 billion hours of music in 2011, more than double of what it streamed in 2010. As Pandora streams music, it can precisely tell the audience size at any given time. It allows advertisers to reach individual listeners based on their age, gender, zip code and music preference.
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Growing smartphone market
According to Gartner's estimates, about 172 million smartphones were sold in 2009. This was an increase of 24% from 2008 numbers. The fast paced growth accelerated in 2011, when Gartner reported that Q3 2011 smartphone sales amounted to 115 million units, registering a growth of 42% over Q3 of 2010. For the full year 2011, the total smartphone sales stood at more than 430 million units. The year 2012 has witnessed the continuation of this high growth and Q3 2012 saw the global smartphone sales increasing by 47%.
We expect the smartphone market to grow at a healthy pace. Pandora's music app which is available for the iPhone, Blackberry, Android, Windows Mobile and Palm is already one of the most popular apps. As the smartphone market grows, Pandora will expand its mobile subscriber base.
Pandora targeting the automobile market
In January 2010, Pandora joined hands with Pioneer, an electronics manufacturer to provide internet radio in cars. Companies like General Motors, Hyundai and Toyota have announced plans to launch vehicles with new systems that will stream online radio from Pandora. Pandora has also developed relationships with major automobile manufacturers, including Ford Motor Company, Mercedes-Benz and MINI (BMW Group), and with suppliers of major automobile manufacturers, to integrate the Pandora service into current and future automotive sound systems.
Competition rising
With Clear Channel Radio launching iHeartRadio service that directly challenges Pandora's unique ability to serve personalized music, and with Spotify's entry in the U.S. market via Facebook, competition has notably risen for Pandora Media. In addition to this, the launch of music service by Microsoft and potential launch of personalized radio by Apple could further make life difficult for Pandora. Furthermore, as Pandora expands more in automobile segment, it will face challenge from Sirius XM.
Internet radio royalty fees to rise
Copyright Royalty Board has set the royalty rates for Pandora internet radio. These rates do not apply to the satellite radio as internet is a different medium. The rates are on a per performance basis i.e. if 100 users listen to one song then it is counted as 100 performances.
Year Rates per Performance
2010 $0.09
2011 $0.10
2012 $0.11
2013 $0.13
2014 $0.14
2015 $0.15
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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