What’s Driving Pandora’s Total Active User Count?

Pandora Media (NYSE:P) is one of the largest Internet radio providers in the U.S. with more than 200 million registered users, out of which about 35% are using its services actively. Over the past few years, the company’s total active user count has increased rapidly, driven by the ongoing mobile boom, international expansion and Pandora’s push into cars. The Internet radio provider’s total active user count soared from 29.3 million in 2010 to 76.2 million in 2013. However, growth in this metric has been relatively slow this year. During the first six months of 2014, Pandora added just 200,000 active users, which is an insignificant figure considering the radio provider’s historic growth standards. ^[1]

While we believe that the Internet radio provider’s active user count will continue to grow in the future, the rate of increase is likely to be slower than what the company has seen in the past few years. With growing competition from Sirius XM (NASDAQ:SIRI) and emergence of free music streaming services such as Spotify, Google‘s (NASDAQ:GOOG) Songza and Apple‘s (NASDAQ:AAPL) Beats, Pandora is unlikely to repeat its historic performance. Yet, with growing smartphone adoption, international expansion and aggressive push in cars, the company should be able to maintain an acceptable growth rate in the long term. We estimate Pandora’s total active user count will increase from 76.2 million in 2013 to close to 120 million over the course of next five-six years.

Our price estimate for Pandora stands at $26, implying a discount of about 5% to the market price.

See our complete analysis for Pandora Media

Growing Smartphone Market

The global smartphone market has grown tremendously over the past few years and it still has to exploit some under-penetrated markets. Global smartphone shipments totaled roughly 968 million for 2013 and IDC expects the figure to increase to 1.25 billion by the end of 2014, reflecting 30% growth. After a strong runaway growth over the past few years, smartphone sales are showing some signs of slowdown. However, they are still expected to increase at a rate that will keep Pandora engaged. IDC forecasts smartphone sales to grow at a compound annual growth rate of 12.7% through to 2018, which will bring the global smartphone market to 1.8 billion by 2018. ^[2] Given that 80% of Pandora’s listening takes place on the mobile platform, continued growth in smartphone market will aid its usage growth. Interestingly, Pandora is one of the top downloaded apps on both – Apple’s app store and Google play store.

Push into Cars

In 2010, Pandora joined hands with Pioneer to provide Internet radio in cars that have Pioneer music systems installed. The device detects Pandora settings when a phone is connected with the system and automatically plays Internet radio. Since the launch of its services in cars, Pandora has struck deals with the world’s leading automotive manufactures such as BMW, Chevrolet, Ford, Mercedes-Benz, GMC, and Lincoln and with suppliers of major automobile manufacturers to integrate the Pandora service into current and future automotive sound systems. ^[3] This move helped Pandora expand its service network beyond PCs and Mobile devices, thus providing a complete solution to its customers.

Recently, Pandora’s vice president of strategic solutions, Heidi Browning, stated that about 135 models from 26 different automobile makers coming out this year will have pre-installed Pandora services. This figure is roughly one-third of all the new models of 2014. According to Browning, all the best-selling passenger vehicles in the U.S. now come with Pandora services. The Internet radio provider currently accounts for just 9% of total radio listening in the U.S., and it has a tremendous opportunity to increase this figure with its aggressive foray in the new vehicle space. ^[4] While there are no clear signs that Pandora will be preferred over satellite radio provider Sirius XM, it is likely to take away some listening time share from terrestrial radio services (with increased user base), who currently dominate the market with over 80% share. ^[5]

International Expansion

Pandora has highlighted its intentions to expand its operations in international markets as a part of its long term strategy. Given that the future of smartphone sales growth lies in emerging markets, it makes sense for the Internet radio provider to launch its services in some lucrative markets. While royalty costs at the moment maybe expensive, we believe that over time they will come down and provide an opportunity for Pandora to sign licensing agreements to promote content on Pandora’s channels.

The company’s services launched in Australia and New Zealand (ANZ) in December 2012, have already drawn significant attention. Less that two years after its launch, Pandora has hit the landmark of 2 million users and it currently attracts two new registered users every minute. Pandora’s highly personalized music stations offering an interactive and social experience to its listeners has been the key to its success in ANZ. The company stated in a press release that its 2 million listeners in ANZ have streamed close to 190 million hours of music across 29 million personalized stations. ^[6]

Pandora’s first international foray has shown promising signs so far, which will only encourage it to look for other global options. As the company launches its services in other countries, its total active user count will go up, which should partially offset the impact of growing competition in the U.S.

How Change in User Count Impacts Pandora’s Stock

We currently project Pandora’s total active user count to increase from 76.2 million in 2013 to over 120 million in the next five-six years. However, if the figure increases to 140 million instead driven by success in the new car space and strong adoption in international markets, there can be about 10% upside to our price estimate. On the flip side, if the figure increases to only 100 million due to fierce competition and slow international expansion, there can be about 10% downside to our price estimate for Pandora Media.

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1. Pandora Reports Q2 2014 Financial Results, Pandora, Jul 24 2014 [↩]
2. IDC Says the Rest of 2014 will be Strong for Smartphones, Mobile Marketing Watch, Sept 2 2014 [↩]
3. Pandora Shifts Into High Gear, Pandora Blog, Sept 29 2011 [↩]
4. Pandora Makes Mark With In-Car Subscriptions, Bidness, Jul 11 2014 [↩]
5. The remarkable resilience of the old-fashioned radio in the US, Quartz, Apr 4 2014 [↩]
6. Pandora Internet Radio Hits Two Million Listeners in ANZ in Under Two Years, Pandora, Jul 16 2014 [↩]