Pandora Media (NYSE:P) is the biggest name in Internet radio and competes with other radio services such as Clear Channel Radio and Spotify. The company will release its Q1 fiscal 2013 earnings on May 23rd, and we are looking for updates on rising content costs, a potential slowdown in listener growth and more clarity on Pandora’s future strategy to differentiate itself from competitors. Although 2011 was a year of stellar growth, things might be different this year primarily because of competitive and content cost factors. Let’s take a look at these below.
Slowdown in Growth
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Pandora reported 88% growth in listener hours in March 2012, amounting to more than 1 billion. The active listener growth for March 2012 was lower than that for full year 2011, indicating a slowdown. The slight slowdown in growth rate could be because of several factors including increased competition, especially from iHeartRadio service of Clear Channel Radio, as well as comparisons with a higher base last year. We will watch for Pandora’s strategy going forward, which is going to be critical to its stock which is priced for high subscriber growth.
Furthermore, the number of active listener hours stood at 567 million in March 2011. If we look at 2011 overall, the company’s total listener hours were close to 8.2 billion – implying about 680 million average monthly listener hours.  This means that listener hours for March 2011 were below average, which suggests that Pandora’s listener hour growth rate for the coming months is likely to be even lower than 88% due to comparison with a higher base from last year.
Content costs have always been a concern for Pandora which has struggled to become profitable despite high growth in listener base. Either the company needs to find a better way to structure content deals or improve its monetization. If the content costs show no signs of coming down, we may reduce our price estimate for Pandora post earnings.
Our current price estimate for Pandora stands at $9.89, implying a slight premium to the market price.Notes:
- Pandora Media’s SEC filings [↩]