Lowering Pandora’s Price Estimate for More Competition, Slower Growth

Pandora Media’s (NYSE:P) stock has taken some lumps in the past month prompting us to reevaluate our view on the stock. We wrote an article recently discussing how Clear Channel’s iHeartRadio app and website pose threat to Pandora’s business given its customized stations. In a recent interview, the company’s co-founder Tim Westergren talked about Pandora’s strategy, and we believe the road is not going to be easy. We have reduced our price estimate for Pandora in light of recent developments and see increased competition, difficulty in international expansion and continued weakness in the economy as limiting factors to its growth Pandora competes with other radio service providers like Clear Channel, Sirius XM (NASDAQ:SIRI) and Spotify which has launched its service via Facebook (FBOOK).

Our price estimate for Pandora’s stock stands at $8.65, implying a discount of roughly 20% to the market price.

Competition, Difficulty In International Expansion And Economic Weakness To Weigh On Pandora

It is clear that customized music stations are no longer going to be only Pandora’s turf. Giants like Clear Channel have recognized this as a growth area and Pandora may need to do something differently to thrive. In addition to this, the company mentioned that it is not going to be easy to expand internationally as getting content licenses is complicated outside the U.S. ^[1] If this situation continues, the user base growth could suffer.

To make matters worse, the U.S. economy is struggling, which could impact car sales thereby affecting Pandora’s growth. If the situation continues, our current estimates may turn out to be optimistic.

Pandora To Rely On Its Algorithm To Differentiate

To counter the competition, it seems that the company is still confident about its algorithm which figures out what people want to listen. ^[1] Having algorithms that analyze user data also helps the company in better targeting the advertisements. But will this be sufficient to thwart off the competition from Clear Channel and others? We believe that Pandora may need to do more than this.

Perhaps It Needs Better Differentiation To Compete In Future

Soon Clear Channel may catch up to efficacy of Pandora’s technique and with a larger pool of songs and artists, it may gain an edge. What is Pandora going to do then?

We believe that there are few directions in which Pandora can look to sustain user-base growth and financial growth.

• Continue to go for the best content. More content is not always useful.
• Continued improvement to the user interface. Keep it simple and engaging.
• Leverage social media partnership with Facebook to get further insights into user tastes. This could help in attracting advertisers.
• Market and extend distribution in novel ways. How about a gamer seeing a small “P” icon when he/she plays online game? Lot of gamers like to listen to music while playing and social gaming could be tapped in this way.

See our complete analysis for Pandora’s stock.

1. Pandora’s Tim Westergren: We’re Right Where We Want To Be, Forbes, Sept 21 2011 [↩] [↩]