Pandora Media’s (NYSE:P) stock has been a bit volatile in recently, dipping from a high of $20 few months back to a low of under $10 little more than a month back. Since then the stock has recovered to the current market price of close to $14. To understand the key drivers of Pandora’s business is the best way to determine its fate as this will help determine the company’s intrinsic value. So what will it take Pandora to actually justify its current market price? We believe that the answer is better monetization and successfully thwarting the competition from Clear Channel Radio. Apart from Clear Channel, Pandora faces competition from Sirius XM (NASDAQ:SIRI) and Spotify, which has collaborated with Facebook (FBOOK).
Our price estimate for Pandora stands at $8.65, implying a discount of about 40% to the market price.
See our full analysis for Pandora
Thwarting Competition & Improving Listener Hours
We expect that Pandora’s future is in mobile devices, and therefore, estimate that this division constitutes more than half of Pandora’s intrinsic value. Therefore we focus our arguments on this segment. If Pandora really has to justify its current market price, it will need to effectively combat the competition from Clear Channel’ iHeartRadio app and website in the future. The impact of Clear Channel Radio’s move is not apparent right now, but given that it challenges Pandora’s unique value proposition, it may snatch away significant number of listener hours from Pandora’s users. Consequently we currently have conservative expectations regarding growth of this metric.
If Pandora has to justify its current pricing, it really needs to grow these listener hours (monthly per user) to around 4, compared to our current expectations of 3. (The figure is low because it is based on total users and not just active users.)
Improved Monetization
In order to justify the current market price, Pandora doesn’t just need to better hook its listeners, but also needs to improve its monetization prospects. The company’s decision of scrapping 40-hour monthly listening cap demonstrates that the future for Pandora lies in advertising supported model, and not subscription. However the mobile platform’s share of total advertising market in the U.S. is very low currently. [1] Therefore, not enough ad dollars are available. However, if Pandora can attract advertisers and increase its advertising revenue per 100 listener ours from current expectations of $5.40 to $7.40 by end of our forecast period it can perhaps better justify is current market price.
Understand How a Company’s Products Impact its Stock Price at Trefis
Notes:- Pandora Slow to Lure Mobile-Ad Dollars Even as Users Flock: Tech, Bloomberg, Oct 12 2011 [↩]