A little over two weeks back Pandora Media (NYSE:P) announced that it crossed 125 million registered users, which gave the stock a boost. Overall this year, the company’s stock has gained more than 30% but still stands below its IPO price. Our user estimates for 2011 stood at 123 million, which we’ll update as soon as the company releases its Q4 2011 earnings this month. While 123 million is just 1.6% below the actual 125 million figure, our $9.48 price estimate for Pandora is at about 30% below its market price. We believe that Pandora is still overpriced based on fundamentals even with the current user growth trend. Pandora competes with Clear Channel Radio, Spotify which has expanded via Facebook (FBOOK) and Sirius XM (NASDAQ:SIRI).
The number of registered users is one of the important drivers of Pandora’s stock. Our price estimate for Pandora is based on our expectation that the company will have 300 million registered users by the end of our forecast period. This is a lot and implies the coverage of almost 85% of the U.S. population six years from now. Although it is likely that Pandora will expand internationally during this period, it will not be easy given the complexities related to content licensing.
A higher user base growth will also be difficult as competition intensifies from a variety of Internet and terrestrial radio players such as Spotify and Clear Channel Radio’s iHeartRadio service, and there are new start-ups such as TuneIn to watch out for. Additionally, costs are a concern and Pandora’s business model is questionable. Even our $9.48 price estimate assumes that Pandora will be able to have costs under control and stay profitable. Given the above, we believe that Pandora does not command the price that the market is currently valuing the stock at.
One may argue that it might be easy for Pandora to cover the whole of the U.S. population as users do not need to subscribe and can enjoy free music. If competition cannot stop subscribers from registering, it will definitely eat up Pandora’s share of listener hours and thereby impact its revenue growth.