Pandora Media’s (NYSE:P) latest automotive partner is the Chrysler group, and with this partnership, its radio service will be integrated across 85 vehicle models.  Pandora has done well in expanding its user base in the U.S., but the in-vehicle market is still dominated by satellite and terrestrial broadcast radio. Although Pandora boasts of more than 150 million registered users and close to 60 million active users, the in-vehicle market is important primarily due to two reasons. First, significant amount of time spent listening to radio is within cars. Second, the vehicle sales in the U.S. saw a sharp rebound in 2012 and the outlook is good too.
The In-Vehicle Market Opportunity For Pandora
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There are a couple of ways to look at the in-vehicle radio market opportunity for Pandora.
The U.S. radio market earned a little over $17 billion in revenues in 2011, and this figure is expected to grow past $22 billion by 2015.  The in-vehicle radio market accounts for roughly half of this, which amounts to close to $8.5 billion. In comparison, we expect Pandora to earn close to $425 million in revenues in 2012, which amounts to just 3% of the total U.S. radio market. Most Pandora users listen to its music on their smartphones and other mobile devices, and therefore the company’s revenue from in-vehicle systems are still very low. This implies that if we solely consider the in-vehicle radio market, Pandora’s dollar share is much less than 3%. This implies a significant opportunity to grow.
Also, the U.S. consumers are buying 14-15 million new vehicles every year. The total vehicle sales stood at close to 14.5 million in 2012 and are expected to pass 15 million in 2013.  Over the course of next five years, Pandora will have an opportunity to establish itself in nearly 80 million new vehicles in the U.S. That’s more than its current active user base of close to 60 million. Apart from this, the company can make efforts to penetrate used-cars as well, similar to what Sirius XM (NASDAQ:SIRI) has been doing.
However, none of this will mean anything unless Pandora can demonstrate that it can actually be profitable. Its cost structure and undersold mobile inventory has prevented the company from churning out profits.
Our price estimate for Pandora Media stands at $9.75, implying a discount of about 10% to the market price.Notes:
- Pandora Expands Reach With More Than 1,000 Partner Integrations, Pandora Media Press Release, Jan 7 2012 [↩]
- The State of the News Media 2012 [↩]
- U.S. Auto Sales Seen Exceeding 15 Million for Full-Year 2013, The Wall Street Journal, Jan 2 2013 [↩]