Pandora Media (NYSE:P) is the leader in Internet radio in the U.S. and stands out in its ability to offer a unique and personalized internet radio experience to listeners. In April 2011, Pandora had over 90 million registered users and had more than 50% share of all Internet radio listening time among the top 20 stations and networks in the U.S. according to Pandora’s May 2011 S-1, as filed with SEC. The stock has slumped since then and even now, seems to be priced for high user base growth and expectation that ad revenue growth in mobile arena will be able to cover the costs and drive profits. This is something that’s included in our base estimates as well. Nevertheless let’s take a look at a scenario in which competitors like Clear Channel, Spotify via Facebook (FBOOK) and Sirius XM (NASDAQ:SIRI) affect the overall radio market in a way that it makes Pandora’s growth difficult.
See our complete analysis of Pandora Media
Growth in User Base Stunts – 40% Downside
We currently forecast Pandora’s total registered users to reach a figure of 300 million by end of our forecast period, assuming that it expands to certain extent internationally. 300 million figure just in the U.S. is unlikely as it will imply coverage of over 80% of the population by end of our forecast period.
Nevertheless, if this registered user base growth slows down and reaches about 200 million by end of our forecast period, it implies a downside of about 40% to our current price estimate.
Growth in Advertisement Revenue Per 100 Listener Hours Reduces – 20% Downside
In terms of revenues, what matters is number of active users. If we assume the active users will remain a certain proportion of total registered users, a decline in growth of registered users will imply lesser active users.
As a result, this could affect advertising pricing and thus impact growth in advertisement revenue per hour 100 listener hours. Currently we forecast this figure to grow from an estimated $3.50 in 2011 to about $5.40 by end of our forecast period for mobile users. If this figure was to grow to only $4 by end of our forecast period, there could be additional downside of aout 20% to our price estimate.
The above scenarios give us a bear case price estimate of $3.81 for Pandora. The estimate may be pessimistic, but not unrealistic if competitions gets too intense for the company.
Our current price estimate for Pandora stands at $9.48, implying a discount of about 10% to the market price.
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