Pandora (NYSE:P) is the leader in Internet radio and offers listeners personalized services based on preset choices and feedback. Apart from being available online, Pandora also has apps available on Apple’s (NASDAQ:AAPL) iPhone, Research in Motion’s (NASDAQ:RIMM) BlackBerry and other smartphones operating on Google’s (NASDAQ:GOOG) Android OS. Advertising is the primary source of revenue for Pandora and mobile advertising contributing around 60% while online advertising contributing another 27% of our $1.9 billion Trefis estimate for Pandora’s valuation.
Here we highlight some of the most important drivers for Pandora’s business and some upside and downside scenarios using our modifiable charts.
View our upside and downside analysis on the Trefis site, if you cannot see the modifiable charts.
~40% Upside Scenario: $2.6 billion Trefis Value Estimate for Pandora
1. Higher Registered Users Growth (+17%):
We currently expect Pandora’s registered user base to continue increasing over the remaining Trefis forecast period even though we expect the growth to decelerate over time.
Mobile Internet growth, Pandora’s expanding sales force, its foray into the automobile segment, additional content, and international expansion can add some upside to our growth assumption for Pandora users. These factors could grow Pandora’s registered user base by 2% points more than our current growth projections implying more than 17% upside to Pandora’s value.
2. Higher Growth in Ad Revenues (+20%):
Along with consumer mobile Internet growth, mobile advertising is expected to grow rapidly from $877 million in 2010 to $6.8 billion in 2014, a 67% compound annual growth rate. 
The Pandora music app is already one of the most popular apps in the world. Therefore, Pandora is well placed to capitalize on the expected mobile advertising growth and grow its ad-revenues per 100 listener hours. Interesting a mix of advertising option on Pandora, higher user interaction in Pandora ads and its expansion in to other territories could make Pandora attractive for an increasing number of businesses. This could increase our forecasted growth rates by 2% points more than our current growth expectations, implying almost 17% upside to Pandora’s value.
~40% Downside Scenario: $1.2 billion Trefis Value Estimate for Pandora
1. Lower Registered Pandora Users (-22%):
Pandora’s registered user base has increased exponentially in the recent past. However, the absolute numbers of Pandora users might soon hit the ceiling if the company is unable to expand its service offering internationally due to continued music licensing restrictions. This could shave off around 3% every year from our current growth expectations, implying almost 22% downside to Pandora’s value.
2. Increased Content Acquisition Costs (-17%):
Content acquisition expenses principally consist of royalties paid for streaming music to the listeners. While Internet radio royalty fees are expected to rise with time, an increasing number of users and increasing listener hours will also require Pandora to pay more royalties in the per track fee agreement.
Pandora may be unable renegotiate royalty rates with the Copyright Board in a favorable and maybe unable to pass on these increased costs to customers in the form of increased subscription fees. If Pandora is able to decrease content acquisition costs as percentage of revenues by only 2% every year over the short term before stabilizing over the rest of our forecast horizon, then this would imply more than 17% downside to Pandora’s value.Notes: