Pandora’s Stock Needs A Haircut Despite Spotify’s Mobile Plans

by Trefis Team
+25.23%
Upside
19.29
Market
24.16
Trefis
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Pandora
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Spotify has launched a free (ad-supported) Internet radio service for mobile devices in the U.S. that directly challenges Pandora (NYSE:P) in its domain. [1] But the question is, how successful could this challenge be?

Let’s draw a comparison with Pandora’s another rival, Clear Channel Radio. Clear Channel launched its iHeartRadio service toward the end of last year and, so far, that hasn’t stopped the growth in Pandora’s phenomenal user base and listener hours. Pandora added close to 25 million registered users in first quarter of this year. This implies that Spotify’s impact on Pandora’s growth is likely to be low, at least initially.

See our complete analysis for Pandora Media

Secondly, given that Spotify is planning to include just 2 to 3 minutes of advertising per hour, it will not be that easy to monetize its service, at least not on the mobile devices where ad spending is still low. This is the same issue that Pandora has been facing, and we feel that selling more mobile ad inventory is the primary concern for Pandora right now, rather than competition from the newcomers. Pandora boasts of a unique algorithm that personalizes the listening experience for its users. Spotify still has to demonstrate how well it can personalize its service.

Further, Pandora is way ahead in terms of geographical and device reach. It will take plenty of time for Spotify to pose a serious challenge. However, a general threat exists due to the presence of Spotify’s on-demand music service on the same devices that carry Pandora’s service, and this may lead to some sharing of listener hours.

Our price estimate for Pandora Media stands at about $7.90, implying a discount of about 30% to the market price.

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Notes:
  1. Spotify Mobile Web-Radio Service Will Challenge Pandora, Bloomberg, June 20 2011 []
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