Pandora (NYSE:P) is the leader in Internet radio and offers music that allows for personalized experience for each listener based on their preferences and feedback. The company filed its IPO in June 2011, and since then its stock has seen several ups and downs. While Pandora continued its rapid user growth over the course of the year, competition has intensified. Apart from being available online, Pandora has also launched apps for Apple’s (NASDAQ:AAPL) iPhone, Research in Motion’s (NASDAQ:RIMM) BlackBerry and other smartphones operating on Google’s (NASDAQ:GOOG) Android OS.
Our price estimate for Pandora stands at $9.48, implying a discount of little under 10% to the market price.
See our complete analysis for Pandora
IPO Launched, But Stock Plunged
In mid June 2011, Pandora launched an IPO for a pricing of $16 per share. At the same time we unveiled our fundamental analysis of Pandora’s business and estimated its value at around $1.8 billion based on our future expectations. Our estimates stood at 40% discount to Pandora’s IPO price. Since then, we have more or less maintained our price estimate while Pandora’s stock has plunged by about 35%.
This has been a result of growing concerns around competition, its business model and economic uncertainty. We note that the stock has plunged despite the company maintaining high subscriber growth, indicating that the market believes that while the present is rosy, the future is highly uncertain.
Extensive User & Listener Hour Growth Continued
Pandora maintained rapid user base growth in 2011 and reached the 100 million mark around mid 2011 shortly after filing its IPO. We estimate that by the end of 2011, the company had close to 120 million subscribers thereby registering a growth of 50% during the year. Additionally, the number of listener hours have increased at even higher rate and reached close to 2.1 billion for just Q3 2011. This implied a growth rate of more than 100% over Q3 2010.
The growing popularity of smartphones has played a significant hand in this growth. In 2008 mobile access accounted for 4.6% of total listener hours. This figure reached about 60% by end of Q1 2011 and has continued to increase since then.
Serious Competition Emerged
In 2011 the company also saw radio competition intensifying with Clear Channel (PINK:CCMO) taking a direct stab at Pandora’s unique value proposition. Clear Channel launched its iHeartRadio app and website which lets users create customized stations, a core feature at the center of Pandora’s business model. Furthermore as Pandora pushed more into vehicle installations, it made a new enemy – Sirius XM (NASDAQ:SIRI). Finally Spotify’s music service, in collaboration with Facebook (FBOOK), further intensified competition for Pandora. Although Pandora’s management sees Spotify as a complementary service, we think that due to the broader media device convergence, the two companies will compete. (See article Can Pandora & Spotify Co-Exist?)
2012 will be a critical year for the company as it will test itself against a new formidable competitor, Clear Channel Radio’s iHeartRadio service. It will be interesting to see to what extent this recent development will affect Pandora’s growth trajectory.
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